do YOU owe Uncle Sam?
One of the things that most people think
they know about bankruptcy is that bankruptcy won’t get you out of paying taxes.
Like most things most people think they know about bankruptcy, that’s not
entirely true. While there are some taxes that are never wiped out in
bankruptcy, most people don’t owe those types of taxes. Most people owe income
taxes, which can sometimes be discharged in bankruptcy. In addition to
the discharge of some taxes, bankruptcy can also offer options to getting taxes
I’m not going to focus on when taxes are or are
not dischargeable in bankruptcy. It is a topic more appropriate
for a law review
article than a blog post. Rather I’m going to focus on when you
should explore the opportunity bankruptcy may offer you to resolve some or all
of your tax debts.
If you have owed income taxes for a
while, go see a bankruptcy lawyer about whether those taxes could be discharged.
The timing issues are very specific and it’s a finicky issue to figure out, but
its worth looking into. There are all kinds of ways that a bankruptcy can help
if some or all of the taxes are dischargeable. The taxes might be completely
discharged in a Chapter 7 case, if you otherwise qualify for Chapter 7, or you
might be able to discharge part of the taxes and reduce your balance to
something you can handle. Or it might be possible to reduce your liability and
pay the balance in a Chapter 13 payment plan.
If you have a tax lien that you need to
resolve, a Chapter 13 payment plan may give you an affordable way to pay that
off. A Chapter 7 generally won’t resolve a tax lien, but in a Chapter 13 case
you may be able to value the property (or the equity in property) that the tax
lien attaches to, and pay that over the life of a Chapter 13 plan.
Bankruptcy can also help if you are
carrying so much other debt (like credit cards or finance companies) that you
can’t afford to pay your taxes. The solution to your tax problem may be as
simple as discharging other debt so that you can afford to pay your taxes, especially if you have
been balancing your budget by reducing your tax withholding, or
not paying your estimated taxes.
It is important to note that bankruptcy
is not always the best answer. You may have legitimate defenses to the tax
liability itself, or you may be better off reducing your tax liability by
presenting an offer in compromise. Every situation is different, and the
intersection of tax and bankruptcy law is one of those places where you really
need an expert. Even better, two experts. If you owe a significant tax debt,
it would be worth seeking the expert opinion of both a bankruptcy lawyer and a
tax lawyer. Ask you bankruptcy lawyer for referral to a tax lawyer who also