When Can Bankruptcy Help You Pay Taxes?

02 Jun When Can Bankruptcy Help You Pay Taxes?

What do YOU owe Uncle Sam?

What 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 paid.

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 understands bankruptcy.

 

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.
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