When someone owes back taxes to the IRS or state tax agency, a tax lien may be placed on their property. This can make it difficult to sell or refinance the property and can also damage credit. For those struggling with back taxes and debt, filing for bankruptcy may seem like a solution to wipe out both debts. However, can tax liens be wiped out in bankruptcies?
The answer is not straightforward and depends on the type of bankruptcy being filed and the specifics of the tax lien.
Best Types of Bankruptcy for Tax Debt
When faced with tax debt, bankruptcy may be a viable option to get a fresh start. However, not all types of bankruptcy are created equal when it comes to dealing with tax debt. Here are the best types of bankruptcy for tax debt:
Chapter 7 bankruptcies: Chapter 7 bankruptcy can discharge some types of tax debt, but only if certain criteria are met. The tax debt must be at least three years old, the tax return must have been filed at least two years prior to filing for bankruptcy, and the tax assessment must be at least 240 days old. Additionally, the taxpayer must not have committed fraud or willful evasion in relation to the tax debt. If these criteria are met, the tax debt may be dischargeable in a Chapter 7 bankruptcy.
Chapter 13 bankruptcy: If the tax debt is not dischargeable in a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may be a better option. In a Chapter 13 bankruptcy, the debtor creates a repayment plan to pay off some or all of their debts over a period of three to five years. Tax debts are included in the repayment plan and the debtor can often negotiate a payment plan with the IRS or state tax agency that is more manageable than the original debt.
Chapter 11 bankruptcy: Chapter 11 bankruptcy is typically reserved for businesses, but individuals with high levels of debt may also file for this type of bankruptcy. In a Chapter 11 bankruptcy, the debtor creates a reorganization plan to pay off their debts over a longer period of time, often up to ten years. This may be a good option for those with significant tax debt who need more time to pay it off.
It’s important to note that bankruptcy should not be entered into lightly, and the decision to file should be made after careful consideration and consultation with a qualified bankruptcy attorney and tax professional. Additionally, bankruptcy will have an impact on credit and may have other consequences, so it’s important to fully understand the potential ramifications before filing.
Strategies for Tax Debt Bankruptcy
If you’re struggling with tax debt and considering bankruptcy, there are several strategies you can use to increase your chances of success. Here are some strategies for tax debt bankruptcy:
File the right type of bankruptcy: As mentioned in the previous article, not all types of bankruptcy are created equal when it comes to tax debt. Depending on your specific circumstances, Chapter 7, Chapter 13, or Chapter 11 bankruptcy may be the best option. Consult with a bankruptcy attorney and tax professional to determine the best course of action.
Plan ahead: If you know you will be facing tax debt, it’s important to plan ahead and make sure your taxes are filed and paid on time. This will help you avoid penalties and interest that can add to the overall debt. If you’re already in debt, take action as soon as possible to avoid further penalties and interest.
Keep good records: Keep accurate and detailed records of all tax filings, payments, and correspondence with the IRS or state tax agency. This will be important in case of a dispute or audit.
Negotiate with the IRS or state tax agency: Before filing for bankruptcy, try to negotiate with the IRS or state tax agency to work out a payment plan or settlement. This can save you time, money, and stress.
Hire a qualified bankruptcy attorney and tax professional: Bankruptcy and tax laws are complex and constantly changing. Hiring a qualified attorney and tax professional who are experienced in bankruptcy and tax debt can help you navigate the process and increase your chances of success.
Follow through with the bankruptcy plan: Whether you file for Chapter 7, Chapter 13, or Chapter 11 bankruptcy, it’s important to follow through with the plan and make all required payments on time. Failure to do so can result in the bankruptcy being dismissed, which can leave you in a worse position than before.
In conclusion, tax liens can potentially be wiped out in bankruptcy, but it depends on the specific circumstances of the case. In a Chapter 7 bankruptcy, tax liens cannot be wiped out, but in a Chapter 13 bankruptcy, it may be possible to remove a tax lien or pay it off over time. It’s important to consult with a qualified bankruptcy attorney to determine the best course of action for your specific situation.
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