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Monthly Archives: June 2010

Discharging Tax Debts in Bankruptcy

It could probably go without saying, but, most of my clients come to me with a variety of debts.  In bankruptcy all debts are not created equal.  With very few exceptions credit card debts can be discharged in bankruptcy — that is, upon the completion of the debtor’s portion of the bankruptcy case, when she receives her discharge, she will owe nothing on those debts. Student loan debts and debts owed under domestic support orders are, with very few exceptions, never discharged in bankruptcy — that is, upon completion of the debtor’s portion of the bankruptcy case, when she receives her discharge, the remaining portion of the debts will still be owed.*

Tax debts fall someplace in the middle and, contrary to many firmly held opinions, can often (but not always) be discharged in bankruptcy.  When determining whether a particular tax debt can be discharged, there are a number of factors that your attorney should be looking at, including (a) what type of tax is owed, (b) how old the tax debt is, (c) whether a tax return was filed, and (d) the chapter of bankruptcy that, given the totality your circumstances you intend to file.

In a Chapter 7 case, for instance, a federal income tax for an individual may be discharged if the tax liability is not the result of fraud or an attempt to evade payment, there is no pending tax lien on your assets, the debt arises from a return you filed more than three years before your bankruptcy petition, and any deficiencies were assessed 240 days (or more) prior to the petition date.  Federal income taxes that meet these criteria may be considered “non-priority” taxes and will be treated like other non-priority, unsecured debt (i.e., like credit card debt).

In a Chapter 13 case, non-priority tax debt is paid in the same manner and percentage as most other  unsecured debt.  Priority tax claims, on the other hand, must be paid in full through the Chapter 13 plan.  While interest continues to accrue on priority tax claims in a Chapter 13 plan, tax penalties do not.  Thus, tax debt that is non-dischargeable, can be paid over the course of five-years in a Chapter 13 case (and potentially longer in a Chapter 11 case).

In some instances it may be worthwhile to explore Chapter 13 as an option because of the tax debt, even where a Chapter 7 case might be otherwise advisable.  Other types of tax liability may be treated differently than the example above.  Only a qualified bankruptcy attorney can properly advise you based on your individual circumstances.  To schedule a free consultation with an experienced bankruptcy attorney, call the Law Offices of James Wingfield at 508-797-0200 or visit the contact page on our website.

*I could go into great detail on how the discharge functions, and how the actual debt is treated is based upon the Chapter of the Bankruptcy Code under which the debtor files, and how the payments creditors will receive depends on their priority, but I will save those discussions for other articles.

The Law Offices of James Wingfield is proud to be a debt relief agency. We help the individuals, families and small businesses of the Worcester area file for bankruptcy relief under the United States Bankruptcy Code. The Law Offices of James Wingfield serves Central and Western Massachusetts clients in Worcester County, Hampden County, Hampshire County and Middlesex County including Worcester, Shrewsbury, Springfield, Westborough, Southborough, Framingham, Northampton, Natick, Amherst, Fitchburg, Leomister, Douglas, Uxbridge, Gardner, Belchertown, Holyoke, Wilbraham and Chicopee. The information contained and obtained in this website does not, nor is it intended to be, legal advice. Contacting us, be it through this website, via email of by telephone does not create an attorney-client relationship. An attorney-client relationship is only created upon execution of an engagement agreement or fee agreement.