Will Bankruptcy Help With Tax Debts?
In some cases, bankruptcy can eliminate back taxes owed to the IRS as well as to state governments, however the devil is in the details. It is certainly not easy to eliminate tax debts in bankruptcy court. If your taxes don’t qualify for discharge and you file for bankruptcy, the IRS will be waiting for you on the other side with additional time to collect your taxes. Under normal circumstances, the IRS has ten years to collect tax bills, penalties and interest from you. Filing bankruptcy temporarily freezes IRS collection efforts, but the IRS then tacks on the 4-5 months bankruptcy period plus 180 days to their collection window. In essence, a bankruptcy filing that doesn’t discharge tax debts will give the IRS close to an extra year to chase you for back taxes.
So when can back taxes be wiped clean by a bankruptcy filing? There are three basic timing rules that apply:
Rule #1: The Three Year Rule
Your tax debts must be three years old from the date they were due. Note that this does not mean from the date you filed. Every year, tax returns are due for most Americans on April 15th. This means that your 2004 taxes are not eligible for discharge until April 15th of 2008. This is the case because your 04′ taxes weren’t technically due until April of 05′ and you calculate the three year period from that point forward.
Rule #2: Your Tax Returns Must Have Been Filed for Two Years Before Bankruptcy
This is where the IRS really puts the debtor between a rock and a hard place. The government knows all too well that many who have fallen behind on their tax bill have also failed to file tax returns. Requiring that the actual returns be filed for two years prior to the bankruptcy prevents seriously delinquent taxpayers from filing late returns one day and bankruptcy the next.
Rule #3: the Tax Must Have Been Assessed More Than 240 Days Ago
This will likely be the easiest requirement to satisfy and essentially requires that the IRS or state taxing authority has formally determined that you owe the taxes you’re trying to get rid of in bankruptcy more than 240 days before you file paperwork with the court. Note that an offer in compromise will delay the 240 day rule while it is pending plus an additional 30 days.
What About Tax Liens?
A tax lien is a public filing that the IRS uses to put the world on notice that you owe them money. Filing for chapter 7 bankruptcy will only eliminate your personal obligation for tax debts, not tax liens that have attached to your property. Any lien recorded prior to your bankruptcy case will survive the filing.
My spouse does not want to file bankruptcy, can I file by myself?
Yes, you can file by yourself, however there are some factors to consider. If any of your debts are joint with your spouse, your spouse will still be responsible for the debt. For example, your spouse is joint on one of your credit cards which has a balance of $3,000.00. If you file by yourself, the debt will be discharged for you, but the credit card company can still pursue collections against your spouse for the full $3,000.00. Why the full amount? Because co-signers are jointly and severally responsible, which means that the full amount of the debt can be collected against either one of the co-signers, not just half the debt. Your spouse should be aware that if he/she does not file, any debts listed in his/her name will still be collectible. Another factor to consider is the income of your spouse. The income of the non-filing spouse must be listed on the bankruptcy petition, even though the spouse isn’t filing because the means test calls for the household income to be listed. This doesn’t affect the non-filing spouse in anyway, but it may make a difference in determining household income under the means test which is explained in more detail under that chapter.
5057 N Harlem
Chicago Illinois 60656
Chicago Illinois Bankruptcy Attorney
Chicago Bankruptcy Attorney Tom Makedonski has successfully handled thousands of bankruptcy cases throughout Illinois . Bankruptcy is not a moral or emotional decision, it is financial decision based on factors such as amount of debt, income, and monthly cash flow. If there is insufficient “disposable income” at the end of each month to make a meaningful debt payment, bankruptcy must be given serious consideration. Many of the most successful people in history first filed bankruptcy before making it big. Tom Makedonski is not just a Chicago Bankruptcy Attorney, he serves Dupage, Lake, and Kendall County.
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy, sometimes called “liquidation bankruptcy” or “straight bankruptcy” is generally the simplest and quickest form of bankruptcy. Chapter 7 Bankruptcy is available to individuals, married couples, corporations and partnerships. With Chapter 7 Bankruptcy you turn over all of your non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to your creditors. Most people have no assets to offer to pay off creditors; in this case Chapter 7 Bankruptcy will give you a clean slate, in a relatively quick manner.
The main purpose of Chapter 7 Bankruptcy is to discharge certain debts, so that you can have a “fresh start.” You will have no personal liability for discharged debts after the filing and completion of your Chapter 7 Bankruptcy case. In a Chapter 7 Bankruptcy case, however, a discharge is available only to individual consumers, not to partnerships or corporations.
What Do I Need To Provide To File Chapter 7 Bankruptcy?
In order to complete and file Chapter 7 Bankruptcy, you must provide the following information:
A list and some background detail on all creditors (amount owed, date incurred)
Information and detail regarding the Chapter 7 Bankruptcy, and your income.
A list of all of your property.
A detailed list of your monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Social Security Card
A Copy of Your Taxes From the Year Prior to Filing
A Valid Certificate of Credit Counseling
What is the Process of Chapter 7 Bankruptcy?
After you have filed for Chapter 7 Bankruptcy an “automatic stay” is ordered which stops, collection actions against you, and your property. The automatic stay goes into effect right away, the moment you file your bankruptcy, giving you immediate relief from creditors.
The Chapter 7 Bankruptcy stay is essentially a civil restraining order precluding creditors from taking any collection action without specific permission from the bankruptcy court. As long as the bankruptcy stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk generally is the one to formally give notice to creditors by serving on them the Notice of Bankruptcy Filing.
About 30 days after the Chapter 7 Bankruptcy petition is filed, the bankruptcy trustee will conduct a “meeting of creditors.” You are required to attend this meeting and provide truthful answers to the bankruptcy trustee’s questions (and questions from creditors if applicable). During this meeting of creditors, the Chapter 7 Bankruptcy trustee will ask you questions about assets, liabilities, income, and expenses. Don’t let the name fool you though, it is very uncommon for any creditors to actually show up.
After the Chapter 7 Bankruptcy debtor has his or her meeting with the bankruptcy trustee, and the trustee is satisfied the information contained in the Chapter 7 Bankruptcy is true and correct, the individual debtor becomes eligible for a chapter 7 discharge. A typical chapter 7 bankruptcy takes a total of about six months from the initial filing to the discharge.
Benefits of Chapter 7 Bankruptcy
Stop Creditor Harassment
Start to Rebuild Your Credit
Eliminate Repossession Debts
How to Rebuild Your Credit
Although bankruptcy can stay on your credit record for seven to ten years, in about two years you can probably rebuild your credit to a point that will get you approved for just about any loan, even a home mortgage. Most creditors look for steady employment and a history, after bankruptcy, of making and paying for purchases on credit.
Many creditors disregard bankruptcy entirely after four or five years. In the long run, bankruptcy may actually improve your ability to obtain future credit. One of the most important items on your credit report is your debt-to-income ratio and, after bankruptcy that number usually improves substantially because your debts are largely eliminated. Also, without the burden of debts you’ll be able to save for a down payment on property, which always improves your standing with lenders. You also may not realize you will be eligible for a Federally secured FHA Loan just two years after bankruptcy.
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