So, you are struggling financially and are curious about bankruptcy options. You’ve heard the rumors about those who have filed and prospered. You’ve also heard the tales about those who have filed and failed. Whatever the case may be, you want to learn more.
Bankruptcy is a declared inability to pay off debts. The process is extremely serious and meant to be a last resort. Even so, bankruptcy often becomes a reality for individuals with monetary issues.
Bankruptcy Ramifications
All too often, though, individuals immediately jump to bankruptcy as the most obvious fix. Unfortunately, this often happens when an alternative option may have been the better long term choice. For example, if you owe back taxes and declare bankruptcy, long term damage may be placed on your credit. And sometimes you may end up owing the taxes even after the bankruptcy.
The IRS could also come after you, especially if you have declared bankruptcy but in reality could have paid off debts using a payment plan or by liquidating certain personal assets. And the last thing you want is the IRS coming after you!
On the other hand, bankruptcy isn’t the end of the world. For example, there are mortgages for people with discharged bankruptcies.
Needless to say, bankruptcy may or may not be the right solution for you. So before taking any action, it is important to work with a tax attorney or bankruptcy attorney to become up to date with all rules and types of bankruptcy if your main intention is to resolve tax debts.
There are four types of bankruptcy options pertinent here. These types are classified under chapters 7, 11, 12, and 13. Within each case, several rules are applied and may vary with regards to tax liabilities.
The more relevant bankruptcy types here that apply to personal tax debt would be Chapter 7 and 13. Chapter 11 typically applies to businesses and Chapter 12 to farms.
Here is a brief summary of each, along with their potential tax liabilities:
Chapter 7 Bankruptcy
Chapter 7 is the most simple and straightforward declaration of bankruptcy. This option follows basic liquidation and becomes the most expedited process for bankruptcy. The people I mentioned earlier — the ones who jump to bankruptcy as a quick fix — beware. Taxes may be forgiven through a Chapter 7 filing; however, there are several requirements. If your taxes were assessed 240+ days before the filing, tax evasion has not been suspected, taxes are 3 or more years old before the filing, tax returns have been filed for the past 2 years, and there is strictly income tax debt, you may be able to release tax debt through this type bankruptcy. If these qualifications are not met, then you will be responsible for taxes after the bankruptcy. One thing that is good with Chapter 7 (and other types) is that IRS collections are usually halted during the bankruptcy proceeding.
Chapter 11 Bankruptcy
Chapter 11 is another of the primary bankruptcy options; it is used primarily by businesses. This type of bankruptcy can allow for businesses to restructure or reorganize in hopes of turning a profit in the future. There are several regulations and monetary restrictions associated with Chapter 11, including time requirements and expensive fees. Back taxes are also usually untouched, and will continue to linger during the restructuring period. Although IRS collection efforts are halted during the proceedings, interest is normally not, which continues to accrue.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy relies on a similar set of rules as Chapter 13, but stands with regards to family farms and fishermen (an individual or corp). In 2005, the bankruptcy code was slightly changed where now a farmer who downsizes to pay off debts and realizes capital gains does not have to pay them in full in order to achieve a bankruptcy discharged (the taxes would be an unsecured claim).
Chapter 13 Bankruptcy
Commonly referred to as Wage Earner Bankruptcy, Chapter 13 deals with individuals who have a regular source of income. Moreover, under Chapter 13, taxes are normally not discharged but paid back over time (sometimes at a discount). Chapter 13 is an effective means to obtain a payment plan with the IRS. This type of bankruptcy is extremely popular but also contains many requirements. For one, you must prove that you have no more than roughly $337,000 in unsecured debt and no more than roughly $1.01 million in secured debt. You must also prove that you have the ability to pay $100 upfront, have filed your tax returns for the past four years, and have completed a credit counseling session. Lastly, taxes will most often stop increasing because normally interest and penalties with unsecured taxes cease (not secured taxes) with Chapter 13.
It is important to identify your individual case and define which of the four major bankruptcy options it falls under prior to taking any action. You should also consult a tax attorney or bankruptcy attorney as they will be able to provide you with the best tax and bankruptcy guidance. From there it becomes easier to analyze your situation and realize the possible impacts of your decision, particularly with regards to tax debt forgiveness.
Photo Credit: ralph and jenny
The post A Primer on Bankruptcy Options and Potential Tax Liabilities appeared first on Len Penzo dot Com.