These days, millions of Americans are struggling with debt, from credit card debt to mounting medical bills. This debt can grow very quickly and make it all but impossible to keep up with regular payments, which leads to penalties which only makes the situation worse. Under these circumstances, many people consider filing for bankruptcy protection.
However, if your debt involves tax debt, you should know that it might not always be discharged like other debts in bankruptcy. Whether this debt is discharged or must be repaid depends on a number of factors, including the type of bankruptcy you file.
Typically, an individual will file either Chapter 7 bankruptcy or Chapter 13 bankruptcy. Chapter 7 is more aggressive and results in the discharge of many debts, meaning a filer will no longer be obligated to pay those debts. Tax debts — and the associated penalties — can be discharged through Chapter 7, as long as a list of requirements is met.
It should be noted that you may not qualify for discharge if you failed to file legitimate returns or if you knowingly evaded tax obligations or committed fraud.
Filers of Chapter 13 generally will not have their tax debt discharged, as Chapter 13 involves court-approved repayment of debts. Under Chapter 13, you would work with creditors and a trustee to reprioritize debts and then determine how much of each debt will be repaid. Tax debt is among the highest priority debts, so it will typically be paid off first and in full.
Whether you are seeking discharge or repayment of tax debt, you need to be aware that bankruptcy is just one potential solution you can consider, and it may not always be right for you. When it comes to unpaid taxes and the resulting penalties, consulting a tax law attorney can help you make decisions that are in your best interests and help you deal with back taxes and penalties effectively.