Among the many myths surrounding bankruptcy is the idea that unpaid federal and/or provincial tax debts do not vanish when a person declares bankruptcy. However, this is a far cry from reality!
When someone files for bankruptcy, only a few categories of debts can be discharged. Personal income tax debts, as well as director’s liability for a company, such as GST/HST/QST and deductions at source, are all forgiven in bankruptcy.
Debts can still be discharged through bankruptcy, even if the debtors owe more than $200,000 in personal income tax obligations, which is more than 75% of their overall debts. However, you won’t be eligible for an automatic discharge if you file for bankruptcy in certain circumstances. Talk to a licensed insolvency trustee if you’re worried you’re headed in this direction.
Government overpayments, such as those from Employment Insurance or Social Assistance, are one type of debt that may not be discharged in bankruptcy. Depending on how the government calculates the overpayment, these debts may follow you even after you file for bankruptcy. A licensed insolvency trustee is the finest source of information regarding whether a debt will follow you or not.
Every case is different, thus I provide the following free analysis to everyone who comes to visit me:
- What additional options are there besides declaring bankruptcy or submitting a proposal to repay the tax debt?
Tax debts will necessitate that you submit all of your old returns to your qualified insolvency trustee. If you owe the Canada Revenue Agency money, you’ll have to provide proof of your debt.
If the CRA has liens on any of your assets (such your property), or has frozen your bank account, they’ll want to know about it. Bankruptcy, on the other hand, does not remove a lien from your home once it has been lodged by the Canada Revenue Agency.
However, depending on a variety of circumstances like your income, expenses, assets, other debts, and family situation, declaring bankruptcy may not always be the most cost-effective, time-efficient, or least intrusive approach to handle your tax debts. When it comes to resolving your tax debt, a consumer proposal to the Canada Revenue Agency and your other creditors may be preferable.
In every scenario, a bankruptcy must meet your demands and not leave you worse off than you were before to the bankruptcy filing.
Talk to a professional insolvency trustee to find out if bankruptcy is the best method to get rid of your tax debts! Your case is unique, and they have the knowledge and expertise to assist you find the best strategy to deal with your debts.
Is tax debt discharged in Chapter 7?
If you meet the following conditions, you can discharge your tax debts in Chapter 7 bankruptcy:
- Income-based taxes are in place. It is only income taxes that can be discharged under Chapter 7. Income taxes or gross receipts taxes must be included in the tax debt.
- For at least three years already, the return was expected. In order to qualify for bankruptcy, you must have paid taxes that were due at least three years prior to filing. However, in the case of a 2005 income tax return for which an extension to submit expired on October 15, 2006, if the bankruptcy petition is filed after October 15, 2009, the tax return due date test will be met.
- At least two years ago, you submitted the return. Before filing for bankruptcy, you must have filed your tax return for at least two years. A late return is not considered a “return” in most courts, and you will not be able to get out of paying the taxes (late means your extensions have expired and the IRS filed a substitute return on your behalf). If you meet the other requirements, you may be able to discharge your tax liability even if you file a late return in other courts.
- More than two months ago, the tax bill was mailed. At least 240 days prior to filing for bankruptcy, the taxing authority must have assessed the tax on you (recorded the liability on the taxing authority’s records). A bankruptcy filing or an offer of compromise from the taxing authority may allow you to extend this time restriction.
- There shall be no dishonesty or evasion. When filing your taxes, you cannot be found guilty of any intentional act of dodging the tax laws if your tax return is neither fraudulent or frivolous. You and your spouse both must have committed an act of fraud or wilfully attempted to evade tax in order for the court to deny your tax debt’s discharge if you submit a joint return.
What happens to owed taxes when you file for bankruptcy?
As unsecured debts, most income tax debts can be discharged in bankruptcy. Even if you have been discharged from bankruptcy, you must pay any income tax owed for tax years following your release.
Secured Debts
In most cases, secured debts are exempt from bankruptcy. Your home or automobile is used as collateral for these loans.
Bankruptcy can entail a shortfall if a house or car is sold to raise money for bankruptcy, but its sale price does not pay the debts owed on a mortgage, secured loan, or hire purchase agreement.
Income Support, Benefit and Tax Credit Overpayments By Means Of Fraud
Bankruptcy can’t include any benefits or tax credits that were fraudulently paid out by the DWP.
Court Fines
Court fines issued for an offence (including speeding and parking fines) and liabilities from a confiscation order made under S.1 of the Drug Trafficking Act 1986 or S.71 of the Criminal Justice Act 1988 shall not be included in bankruptcy proceedings.
Personal Injury Claims
If you owe money to the MIB (Motor Insurers’ Bureau) because of personal injury claims made against you, those debts will be excluded from bankruptcy.
Debts Gained Just Before Bankruptcy
Excluded from bankruptcy are any debts accrued shortly prior to bankruptcy, when the credit agreement could not be honoured (the debt paid).
Bankruptcy Advice
To see if you qualify for bankruptcy and how it will affect your current circumstances, you can use our online bankruptcy test tool, which will provide you a free assessment of whether you are eligible. Our “Free Guide to Bankruptcy” will be sent to your email address as well.
Or, if you prefer, you may call our Bankruptcy Helpline at 0800 368 8231 to speak with a bankruptcy expert (freephone, including all mobiles).
Bankruptcy Alternatives
Bankruptcy is an option for people who are drowning in debt, but it should only be regarded as a LAST RESORT because the court will expect you to have exhausted all other options.
Consider the following questions before submitting an application for bankruptcy:
Does the IRS forgive back taxes?
An “offer in compromise,” as it’s known, may allow you to receive tax relief. With this, you can negotiate a lower back tax payment with the Internal Revenue Service. This can be a possibility if you can’t pay your tax obligation or if doing so will put you in a difficult financial position, according to the IRS.
Can you declare bankruptcy to avoid taxes?
Only if all of the following conditions are met may you discharge or wipe off your tax liability through Chapter 7 bankruptcy: Federal or state income tax debt is to blame for the debt. There are some taxes that can’t be discharged in bankruptcy, such as fraud fines and payroll taxes. In this situation, declaring bankruptcy is not a viable option.
Can you declare bankruptcy on income tax?
For most people, the answer is yes, you can file for bankruptcy if you owe back taxes. In reality, more than half of those who file for personal bankruptcy have some kind of tax liability attached to them. In general, it is a combination of personal income tax, HST, and source deductions, as well as the director’s duty for corporate tax bills.
Does bankruptcy Cancel back taxes?
During your bankruptcy, the automatic stay prevents the IRS from collecting tax debts. As soon as you declare a Chapter 7 or Chapter 13 bankruptcy, the automatic stay will prevent the IRS from attempting to collect on any tax debt you owe. For example, the IRS may be able to collect from you in the future, depending on the nature of your tax liability.
Does bankruptcy clear tax debt UK?
When filing for bankruptcy, what year’s income taxes are included? It used to be that tax debts were given preferential treatment, but that status was abolished in 2003 when the Bankruptcy Act was passed. Although there are some issues, this article examines all the main sorts of taxes and what happens to them when you file for bankruptcy. In particular, the current year’s council tax is being handled differently in bankruptcy this month (April 2014).
Income tax
Your bankruptcy includes all income tax debts owed from past tax years. Also included is any income that you would have owed for the current tax year. Payroll tax codes are set to NT in order to avoid any future income tax payments, which will be withheld from your wages.
As a result, you will not be any better off because you will not have to pay income tax this year.
To avoid tax, the extra money you’re receiving in your pay packet will instead be seized by the Official Receiver (OR) in an Income Payments Agreement (IPA). Some of the expenditures of the Insolvency Service are covered by this arrangement.
Taxes and other paperwork are over at the conclusion of the tax year, or when a person changes jobs during the tax year. Return to standard PAYE tax code. An comparable reduction in IPA may result in the IPA being terminated for certain patients. A post-discharge IPA cannot be imposed even if your income increases.
There is a good chance that your tax code will remain unchanged if you file for bankruptcy at the end of the year.
Please call the OR and ask if you have any questions about how much or who you should pay “taxes,” if any. If you’re unsure, it’s best to set aside the extra cash in case the OR comes calling.
Council Tax
Whether or not a summons was issued by the council, all prior year’s council tax bills are included in the bankruptcy.
Your current council tax bill is included in your bankruptcy filing. Arrears for this year as well as upcoming payments are included.
- Your partner may be held responsible for the whole amount of your council tax if you share a home with someone who is required to pay it (e.g. not a child or a student).
- If you don’t have to pay council tax for the remainder of the tax year, your IPA will probably be greater, much like if you didn’t have to pay income tax for the year.
If you later move house
When you filed for bankruptcy, the council tax for the residence where you were residing at the time was deducted from your bankruptcy estate.
You must begin paying council tax as soon as you move into a new residence. You didn’t owe this money when you filed for bankruptcy, therefore your bankruptcy doesn’t affect it at all.
It’s possible that you’ve been overpaying your IPA as a result of the council tax levied on your previous residence. Get in touch with your OB/GYN and ask them to help. In other words, you won’t be “paying twice” because you’ll have to pay more in IPA before you move, and then less in IPA afterward, but you’ll have to pay more in council tax afterward.
Other taxes
If you’re not running a business, you’re unlikely to have any tax arrears from previous years to pay.
In the year following your bankruptcy, you will continue to pay National Insurance contributions from your salary.
Self-employment
It’s best to consult the Business Debtline for guidance on the realities of going bankrupt if you’re self-employed. Businesses with assets are typically shuttered; those without assets may be allowed to continue operating. Your bankruptcy will include all of your tax debts, including those owed for the current year and any prior years.
After then, you’re free to start a new firm, but you’ll be held liable for any debts that accrue as a result (except for income tax in the current tax year, see above). You must re-register for VAT under the new number if you were previously registered.
If your inability to pay your taxes was a major factor in your bankruptcy, and you intend to keep your business going, you should use the fresh start provided by a new start to begin setting aside money each month to pay your taxes. You cannot deduct these future tax payments from your business profits to cover personal costs. Bankruptcy does not exclude you from having a savings account, so you may want to start stashing away some of your monthly tax refunds in this account.
Conclusion
As a general rule, bankruptcy wipes out all tax debts. If you’re self-employed, you’ll want to consult with a tax professional about the implications for your firm.
The current year’s income tax and council tax changes are complicated, but you should assume that you will not be better off as a result. For those contemplating bankruptcy, it’s usually best to overlook these issues because it’s unlikely they’ll have any bearing on their decision.
What is the 2 out of 5 year rule?
You must have resided in your house for at least two out of the last five years prior to the date of sale in order to meet the 2-out-of-five-year requirement. After two years, you’re only able to claim this exception once per two-year period.
What is the lowest payment the IRS will take?
You may be eligible for a simplified payment plan if you owe more than $10,000.
- In most cases, the IRS will approve these programs without requesting more financial information.
- The 72-month maximum payment period does include a minimum payment, which is equal to your sum outstanding divided by that time.
What is the Fresh Start program with the IRS?
Debt relief alternatives offered by the IRS are referred to as the IRS Fresh Start Program, which encompasses all of them. The goal of the program is to make it easier for people to legally get out of tax debt. Your debt load may be reduced or even halted if you choose certain options.
