Information you need about Income Taxes and Bankruptcy

We discuss what happens to income tax debt in a bankruptcy and what you can do.


Today I'm going to talk a little bit about your income taxes and a bankruptcy.

One of the rules that occur when you do file bankruptcy is that you have to have filed all your income tax returns for the previous years. If you are required to file a return because you had income, you have to file the return.

But if you are filing a Chapter 13 bankruptcy, the actual money owed can be included in the Chapter 13 bankruptcy.

Generally, in a Chapter 7 bankruptcy, if the taxes are for over 3 years, they're income taxes, their tax returns were filed on time, these taxes, which are over 3 years old (generally which I call overtaxes), can be discharged or gotten rid of in your Chapter 7.

If you owe recent taxes, you are allowed to pay them over a 5 year period in a Chapter 13 bankruptcy.

For example, if you had a distribution from a 401K or self-employment income, and your tax bill was $12,000, and your tax bill is from this year, you can propose a Chapter 13 bankruptcy which pays the income taxes at $200/month over a 5 year period.

We also suggest, if you are going to file a Chapter 7 bankruptcy and you owe recent taxes (within the last 3 years), going down to the Internal Revenue Service, making sure your tax returns are filed and working out a repayment plan.

We always find that the Internal Revenue Service is extremely fair. They will accept your budget. They do have guidelines, but they will work within your budget in order to collect their taxes.

The real important notice to take is to understand you have to file your tax returns before you file your bankruptcy. Otherwise, your bankruptcy will not be allowed. You will not be able to get a Chapter 13 plan confirmed, and your Chapter 7 trustee can ask that your Chapter 7 case be dismissed.

Now, the other hand, for example, your only income is from Disability or Social Security, and is maybe less than $8-$9,000 per year, you might not have been obligated to file a tax return. And the bankruptcy system will allow you to file an affidavit to that effect.

So, if you don't have your tax return because you didn't earn enough money, and you can file an affidavit, that might be something to consider if you are filing a bankruptcy.

But generally, as long as you follow the rules, even if you don't have the money, the Internal Revenue Service will work with you, either in a Chapter 13 or a payment plan.

Thank you.