Tax Debt and Chapter 7 Bankruptcy in New York City

Tax Debt and Chapter 7 Bankruptcy in New York City

Discharging tax debt in Chapter 7 bankruptcy is possible and regularly happens for our clients in New York City.  There is a lot of conflicting information about discharging tax debt because the general rule that income taxes can’t be discharged has a lot of tricky exceptions.  In fact the exceptions often outweigh the rule for most of our Chapter 7 bankruptcy clients, but people with tax debt should consult an experienced bankruptcy attorney to evaluate their situation.

The general rule for eliminating tax debt in bankruptcy states that the tax debt must: A. be income taxes, B. originally be due at least 3 years ago, C. be filed at least two years prior to your bankruptcy filing date, and D. the income tax debt was assessed by the IRS at least 240 days prior to your filing date.  There are many factors that alter or “toll” these time limits like re-filing or amending a tax return for example, so they are not hard and fast rules that can be applied to every case.  Despite the stringent guidelines, many of our client’s will automatically have their income tax debt discharged in a Chapter 7, while others will rely a Chapter 13 to get the income tax discharge they need.

However, once you receive your Chapter 7 discharge there will be no way to address a missed IRS time limit, and you won’t be able to receive another Chapter 7 discharge for another 8 long years.  This can be very painful while you wait if you have missed a time limit.  A better strategy for dealing with tax debt is often to file for Chapter 13 instead of Chapter 7.  After filing a Chapter 13 case, we will wait to see there is any proof of claim from the IRS.  After seeing the proof of claim we will know if the debt can be repaid through your Chapter 13 plan or if we should let the case get dismissed without a discharge.  Letting the case close before receiving your discharge will allow you to re-file for bankruptcy once you have met the IRS time limit without having to wait another 8 years.  Forcing a proof of claim from the IRS makes sure they have the correct amount owed to them as well.  If it is inaccurate we will object to the amount owed and fight the claim in court.  If you don’t receive a discharge you can almost always re-file for bankruptcy immediately to get a discharge in your next case.  This will keep the creditors at bay and will also allow you to include your newly dischargeable tax debt in the new filing.

Every case is unique, and the tax code is complex.  Discharging tax debt in bankruptcy is an involved process best left to a real bankruptcy pro.   Even debtors filing Chapter 7 have some hope of discharging income tax debt through bankruptcy.  However, a strategy that employs multiple filings or a combination of both Chapter 7 and Chapter 13 may be the best way to handle tax debt in bankruptcy.

If you are underwater on your bills and thinking about bankruptcy, but also have significant tax debt you don’t know how to deal with contact the Law Offices of William Waldner online or at 212.244.2882 to arrange a free bankruptcy consultation today.  We only practice bankruptcy law and as of 8/31/16 maintain a 99% Chapter 7 discharge record in New York City.  We offer affordable bankruptcy assistance for all New Yorkers and know the best possible ways to eliminate tax debts for every bankruptcy situation.

This article is intended for educational purposes.  By reading this no attorney-client privilege has been created.

William Waldner