Wednesday, June 10, 2009

Are you considering bankruptcy as an option in dealing with your tax debt?

Many people consider bankruptcy as one possible way to deal with their debt. But will it help you deal with your tax liability?

Before filing for bankruptcy keep in mind how it will effect your credit. It will remain on your credit report for at least 7 years, usually 10, depending on the credit agency guidelines.

If you do choose to file, there are two main options for most individuals to consider.

Chapter 7 Bankruptcy is a liquidation of your assests, reducing everything to cash in order to make distributions to your creditors. In cases where the individual has no assets he or shes receives a discharge that releases him or her from certain dischargable debts. The discharge typically comes about 3 months from the date of filing the petition. The most important thing to know regarding your tax liability and Chapter 7 is that only tax debt prior to the past 3 years can be eliminated in your Chapter 7 filing. So, any tax liability assessed to you within the past 3 years will NOT be eliminated in Chapter 7 bankruptcy. Tax debt prior to the past 3 years may or may not be forgiven. The IRS does have the ability to reject the request. So in many cases, Chapter 7 is not a good solution to dealing with your tax debt. If you do choose to use it, you should hire a reputable attorney who will thoroughly work your case and seek to eliminate as much debt as possible, including tax debt prior to 3 years. Remember though, there is no guarantee the IRS will forgive any debt at all.

Chapter 13 Bankruptcy is an adjustment of debts for individuals with a regular income. It allows the debtor to maintain current assets and work out a payment plan to deal with their debt, typically taking 3 to 5 years to complete. The debtor must complete the payments required under the plan before the discharge can take place. A good bankruptcy attorney will work out a payment plan for you that allows you to make payments to the IRS during your bankruptcy.

Remember that penalties and interest on your tax debt continue to accrue throughout bankruptcy. A lein may also remain in effect through Chapter 13. Also, the statute of limitation- the 10 years that the IRS has to collect on you after the date of assessing your debt, is frozen during bankruptcy. So this period of time does not in any way help you "ride out" the amount of time the IRS has to collect on you. Though the IRS will not attempt to collect from you during bankruptcy, you will have to deal with the debt as well as the penalties and interest that have accrued, after your discharge.

See the government's website below for more information on bankruptcy. Contact me personally if you'd like to know more about how bankruptcy may or may not be able to assist you in dealing with your tax liability.

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