Tax Bankruptcy
Many lawyers consider bankruptcy to be the last resort for dealing with delinquent taxes. It is true that commonly all income taxes, both Federal and State taxes may be discharged in bankruptcy if they are old enough. There are two basic types of tax bankruptcy available to average taxpayer to write off delinquent taxes: liquidation under Chapter 7 and payment plans under Chapter 13.
Chapter 7 Tax Bankruptcy means all of bankrupt taxpayer's assets, except certain exempt, and liabilities are seized and sold to set off the debt in the order specified by the bankruptcy code. If non-exempt assets are not sufficient to pay all creditors, most of the unpaid debts are discharged. Chapter 13 Tax Bankruptcy provides a possibility to pay off the debt by making installment payments to the creditors according to an accepted payment plan.
When it comes to the income taxes, they are generally dischargeable in Chapter 7 provided the taxpayer meet all of the following criteria, as stated in the bankruptcy code:
- The tax was assessed more than 240 days prior to filing of the bankruptcy petition;
- A tax return was filed more than two years prior to the filing of the bankruptcy petition;
- The tax is for a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition;
- The tax was unsecured;
- The tax was not assessable at the time of the filing of the bankruptcy petition;
- The tax was not due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat the tax.
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