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Can You Discharge Tax Debt in Bankruptcy?

Many Bankruptcy clients struggle with tax debt.  Here are some things to think about:

Get Your Tax Transcripts

To diagnose and fix your tax debt problems, you’ll need to get account transcripts. Make a request to the IRS for each year you owe a balance. They show when your tax was due and when the return was filed.  They also show when each charge was added to your account. You can get account transcripts on the IRS web site. If you have trouble getting these before you make your appointment, don’t worry.  We can get them for you if you give us power of attorney and pay a transcript fee.

Priority Claims Must Be Paid In Full

A priority tax claim is an income tax debt that is recent (generally speaking, less than three years old. Because the actual calculation is complex, you should speak to a bankruptcy attorney. For the most part, these tax debts that can’t be discharged in bankruptcy. You’ll want them to be paid off by your bankruptcy. In Chapter 13, a priority tax debt must be paid in full over the life of the plan. Chapter 13 plans usually run for three to five years.

Examples

If you owe $10,000 in priority tax debt, you can generally pay that debt in roughly $200 a month payments. The benefit of priority tax claims in bankruptcy is that they must be paid before non-priority debt, like credit cards or medical bills. If your disposable income is $250 a month and you owe $10,000 in priority tax debt, the first $200 of each payment will go to taxes. Since this needs to be paid anyway, only $50 will go to credit cards. The higher your priority debt, the less you’ll pay in non-priority debt. This leaves more for you to discharge at the end of your bankruptcy case. Remember that even if you pay priority tax debt in your Chapter 13, you may have to pay some accrued interest (currently four percent) after your plan is over.

Tax Liens Must Be Paid Off, But Can Be Modified

Tax liens filed against you can present new problems.These are classified as “secured debts” in bankruptcy. This means that, like priority debts, they need to be paid in full over the life of your plan. What makes secured debts tricky is that the IRS can classify a tax debt as secured even when that debt would otherwise be dischargeable in bankruptcy. This means that by getting a lien, the IRS is preventing you from discharging certain debts in a Chapter 13 case. The good news about tax liens is that they can be “crammed down” in bankruptcy. To determine the secured claim created by a tax lien, you count up all the assets you have. Your secured claim is the lesser of the dollar amount of the lien, or the value of all your property put together. Contact a bankruptcy attorney if you have tax liens, because there are sometimes other creative things we can do to save you money.

Some Tax Debts Are Neither Priority Nor Secured

This means they can be discharged in either a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy. When you consult a bankruptcy attorney about your tax debts, you may be advised to wait to file, in order to age out certain debts and make them dischargeable. If they’re dischargeable, this means they get thrown into the pot with all your credit cards, medical debts and personal loans, and they’re paid out of your disposable income. Whatever can’t be paid out of disposable income after all the other higher-priority debts are paid, are wiped out at the end of a successful Chapter 13. 

Make An Appointment With A Minnesota Bankruptcy Lawyer Today

Discuss your concerns with an Minnesota bankruptcy attorney who is professional, approachable, responsive, efficient and effective.Call Brea Buettner-Stanchfield at The Buettner Law Group, LLC 612-377-5311 or e-mail now for a free consultation.

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