More about Tax Bankruptcies

Today TaxMama hears from Enrique in California, who just learned something new. “I read that one can file for tax bankruptcy. If so how does one go about it? I was not sure if was true or not, and I saw your web site along with the article I read. Any help will help.”

Dear Enrique,

Guess what, it is true!

You may file bankruptcy specifically to discharge your tax debt. Here are some explanations from 2005, when we had quite a discussion about the topic.
http://taxmama.wpengine.com/tax-quips/tax-bankruptcies/

Judy Schonfeld, EA has provided additional information.

Just a quick comment regarding bankruptcy – if a tax year is dischargeable and a federal/state tax lien has been filed, the tax debt can be discharged in a chapter 7 bankruptcy.

However, the tax lien will survive the bankruptcy if the taxpayer has real property. It may be possible to satisfy the surviving lien after the bankruptcy with the Special Procedures office (or whatever they now call that unit!).

In addition, if the lien expiration date is coming close, then it may expire after the bankruptcy and it cannot be refiled, as the debt has been discharged in the bankruptcy.

Also, if liens have been filed and the taxpayer has NO real property, the state and the IRS will release he lien(s) after the discharge.

I agree with you that taxpayers who owe taxes and need to file a bankruptcy should consult with an attorney who understands how the bankruptcy laws affect the discharge of taxes. There can be much to evaluate and you don’t want to file one day too soon.

Enjoy your newsletter – thanks.

Judy Schonfeld
Enrolled Agent

 

Basically, the taxes have to be ripe, or mature, before you can discharge them. In other words, the tax debt has to be old enough. You can’t discharge recent tax debt.

Remember, this is like a regular bankruptcy. So secured creditors get paid first. If IRS and your state have filed liens, they will get your assets before other, non-secured creditors do.

Read the articles. Then, talk to a tax attorney who understands how to BK taxes. Not all even believe you can do that – so do a bit of screening. S/he can set you up on a schedule and a plan, so when the time is ready, you will be able to discharge the taxes.

And remember, you can find answers to all kinds of questions about tax bankruptcies and other tax issues, free. Where? Where else? At TaxMama.com.

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