If you meet the following criteria, you will be allowed to discharge your tax debts in Chapter 7 bankruptcy: Taxes are levied on a per-capita basis. The only type of debt that can be discharged under Chapter 7 is taxes. It must be a tax debt for federal or state income taxes or gross receipts taxes.
When Can IRS debt be discharged in Chapter 7?
The IRS is a firm believer in following the rules. Almost everything is governed by a set of rules. So it’s no surprise that bankruptcy has its own set of laws, and that the IRS would oppose to a discharge if it has a valid basis to do so.
Only income tax debt is discharged in a Chapter 7 bankruptcy. Aside from that, the space isn’t properly defined. Taxes on Form 1040 are unmistakably income taxes. Property and trust fund taxes, on the other hand, are not income taxes. You’ll need to know what kind of taxes you owe in order for Chapter 7 to be able to wipe off your debts.
If you’re obligated to file, you must have done so for the previous two years. At the time you apply for bankruptcy, your tax returns for the debt you wish to discharge must have been on file for at least two years. Even if the taxes were filed on time, the two-year waiting period applies. The IRS frequently generates alternative returns and utilizes these to compute the taxpayer’s arrears if the taxpayer fails to file. Substitute returns are not considered to be filed by the taxpayer.
The tax debt must have been owed for at least three years. It’s worth noting that April 15th isn’t usually Tax Day. It can be April 16th, 17th, or even 18th in some years. The IRS has been known to object to discharges lasting more than one or two days. So, make sure you file your petition on the exact day, or you’ll have to start all over again.
It’s not possible for your tax assessment to be older than eight months. The income tax liability is not dischargeable if the IRS has not assessed the debt within the last 240 days. Because this is done internally, it’s nearly impossible to know if the IRS has assessed the debt or not. However, the IRS is unlikely to have assessed the debt if the taxpayer has not received a bill that breaks down the amount owing by tax years.
Special Rules for Student Loans
Other sorts of government debt are subject to different rules. Student loan debt, for example, is rarely dischargeable under Chapter 7. In most cases, debtors must demonstrate undue hardship in order to have their school debts forgiven. Because the Supreme Court has not ruled on this question, undue hardship implies various things in different parts of the country.
How many years of tax returns do I need for Chapter 7?
In bankruptcy, the IRS only releases taxes due if specific conditions are met. If you do not meet these requirements, or if you miss a deadline by even one day, the tax may be owed at the conclusion of your bankruptcy case. The following are the requirements:
- Only Income Taxes – A Chapter 7 bankruptcy can only be used to discharge income taxes. Payroll taxes, company sales taxes, excise taxes, and other sorts of taxes are usually not allowed.
- The three-year rule states that a child must be at least three years old. Only taxes that are at least three years old can be included. The timer begins on the due date of the return. Every year on April 15th, this occurs. The three-year timeframe begins on the tax-filing extension due date if you request one. The 15th of October is usually the date.
- At Least Two Years Have Passed Since It Was Filed — You must have filed your tax return for the unpaid taxes at least two years ago. You can’t, for example, file a three-year-old tax return and then include the taxes owed in bankruptcy the next week. The tax is old enough in this case, but the submission is too recent.
- Not from a Substitute Return – When the IRS files a return on your behalf, it is known as a substitute return. A substitute return’s taxes cannot be included in your bankruptcy. You are responsible for filing your own tax return.
- Assessed at Least 240 Days Ago – A tax assessment occurs when the IRS makes adjustments to your return or adds to your overdue taxes. Assessed taxes can only be included if they were assessed more than 240 days ago.
- No Fraud or Evasion – You cannot include taxes in your bankruptcy if you have been convicted of tax evasion or fraud.
In addition to the aforementioned conditions, you must show the courts that you have submitted tax returns for the previous four years. A copy of your most recent tax return is also required. If you have any tax liens, a Chapter 7 bankruptcy will not be able to remove them.
What type of debt Cannot be discharged?
If a creditor objects during the lawsuit, the following debts will not be dismissed. Creditors must show that the debt falls into one of the following categories: Debts incurred as a result of deception. Debts for expensive items or services purchased 90 days prior to filing.
What is the 2 out of 5 year rule?
The two-out-of-five-year rule specifies that you must have resided in your house for at least two of the previous five years prior to the sale date. This sum can be deducted each time you sell your home, but you can only do it once every two years.
What is the Fresh Start program with the IRS?
The IRS Fresh Start Program is a catch-all term for the IRS’s debt reduction programs. The program aims to make it easier for people to lawfully resolve their tax obligation and penalties. Some methods may be able to help you reduce or freeze your debt.
How much will the IRS usually settle for?
An IRS settlement in an offer in compromise typically costs $6,629. Doesn’t it sound appealing?
In truth, the IRS received 68,000 offers in compromise from taxpayers in 2014.
This equates to a 40% acceptance rate.
If you’re a “glass half full” kind of person, that’s a 60 percent rejection rate.
That doesn’t mean you’ll be able to settle with the IRS for that amount, or that your offer would be accepted with a 40% chance.
When determining the settlement value of an OIC and whether to accept or reject it, the IRS follows a fairly particular procedure.
How you fit within the IRS formula determines your success.
What will I lose in Chapter 7?
Unsecured obligations, such as credit card debt, medical expenses, and unsecured personal loans, are often discharged in a Chapter 7 bankruptcy. At the conclusion of the process, which usually takes four to six months, the court will discharge these debts.
Some unsecured obligations aren’t routinely discharged in a Chapter 7 bankruptcy, including:
Your creditor may raise an objection and prevent the discharge of certain obligations. A credit card company, for example, might raise an objection to debt from recent luxury goods purchases or cash advances, and the court might rule that you still owe this portion of the credit card sum.
In addition, a Chapter 7 bankruptcy may be used to erase secured loan obligation. Secured loans are ones that are backed by collateral, such as your home for a mortgage or a lien on your property from a creditor. Even if your obligation is erased, your creditor may still be able to foreclose or repossess your property.
Will I lose my tax refund if I file Chapter 7?
The first step in deciding whether you can keep your tax refund is to determine whether it was earned before or after you filed for bankruptcy.
Any revenue received after filing for bankruptcy that results in a profit is yours to keep. If you receive a tax refund based on income earned before declaring bankruptcy, it will be included in the bankruptcy estate, whether you receive it before or after the filing date.
The estate receives tax refunds. It’s dealt with as if it were cash or money in a bank account. (See Chapter 7 for more information.)
The estate receives a tax refund based on income generated before you filed for bankruptcy (but not any return based on income produced after the filing date).
How much cash can you keep when filing Chapter 7?
If you have concerns about any of your assets, you should consult with a local bankruptcy attorney. What if you have a non-exempt asset, though?
Many people have worries and questions regarding how much money they may keep in the bank when they file for bankruptcy.
Will you lose every dime in your savings if you file for bankruptcy? The answer is no: in a Chapter 7 case, some cash can be excused.
For example, you can normally have around $20,000.00 cash on hand or in the bank on the day you file bankruptcy under Federal exemptions.
On the day I file their bankruptcy, the vast majority of my clients had less than $20,000.00 in their bank account. Let’s pretend, for the purpose of argument, that you had $23,000.00 in your bank account on the day I filed your bankruptcy. The Chapter 7 Trustee has the option to pay your creditors the amount that exceeds the exemption amount.
So you keep $20,000.00 (the exempt amount), while the trustee takes $3,000.00 (the non-exempt amount) and distributes it to your creditors.
You wouldn’t owe any additional money to your discharged creditors, and your bankruptcy would still be successful. While this scenario may appear extreme, I have worked on a bankruptcy case where the individuals had more than $20,000.00 in the bank on the day the bankruptcy was filed.
What are 5 dischargeable debts?
One common misunderstanding concerning bankruptcy is that all of your debts will be erased or discharged. Unfortunately, not all debts are dischargeable, so you’ll have to pay off some of your remaining bills even if you file for bankruptcy. Certain debts may be discharged more easily depending on the type of bankruptcy you file. Debtors are frequently able to dismiss a large amount of debt under Chapter 7 bankruptcy. As a result, it’s critical that you grasp the distinction between dischargeable and non-dischargeable obligations as a debtor so that you know what to expect when you file for bankruptcy.
We understand how stressful financial uncertainty can be in every aspect of your life at the Bradford Law Offices, PLLC. That is why we are committed to assisting you in understanding your debt relief choices through Chapter 7 bankruptcy. Contact a Raleigh Chapter 7 bankruptcy attorney immediately at (919) 758-8879 to schedule a free consultation to learn more about the distinction between dischargeable and non-dischargeable debts.
