How Bankruptcy Could Help You Overcome Tax Debt

These are hard financial times for so many families across the country. With costs up and wages remaining stagnant in many lines of work, people are struggling to keep up with taxes. In 2020, the IRS reported Americans owed $114 BILLION in back taxes. This shocking number shows just how challenging the road to financial recovery has been for many Americans.

Thankfully, there are options out there to help you and your family get back on track. One option that carries many stigmas with it is the idea of dispensing tax debts through bankruptcy. The word bankruptcy has a taboo around it, but it’s essentially the legal version of hitting the reset button on your finances to get you in a place to thrive later on.

We want to help you understand how the bankruptcy process can specifically tackle your tax debts.

Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy

At Hedtke Legal Group, we handle both Chapter 7 and Chapter 13 bankruptcy cases. Both of these would be options to cut down the burden that comes with overwhelming tax debts.

Through Chapter 7, you may be able to forgive those debts entirely. As long as your tax debts qualify for bankruptcy you will likely have no responsibility to pay off older tax debts once your case is complete. 

Through Chapter 13, you can create a roadmap to paying back what you owe without accruing more interest. In these cases, you will come up with a plan to pay off debts over a period of several years (generally three or five years). These payments are likely to be lower than any offer you’ll receive from the IRS. As long as you make payments on time and in totality, your tax debts will be solved over the course of your payment plan.

Immediate Relief

When you file for bankruptcy, the court will issue an injunction that puts an automatic stay on your debts. This means the IRS will not be able to demand payments, file liens against your property, or garnish your wages while the stay remains in place. The only way to lift the stay is through a direct request from the debtor (in this case the IRS) which must be approved by the court and requires a legitimate reason.

This brings immediate relief while the bankruptcy case plays out. This isn’t the permanent relief you need, but it does provide some time to get your finances in order in the event your bankruptcy case is denied.

Some Tax Debt Can’t Be Discharged

Keep in mind that not all tax debts are dischargeable through bankruptcy. We recently wrote about debts that aren’t, and we included certain federal and state taxes on our list.

The government will still expect you to at least attempt to pay off any recently imposed taxes, so your bankruptcy case will focus on older debts. As a general rule, the taxes you were charged with paying three or more years ago will be fair game in a bankruptcy trial. Those imposed more recently than that will stay on your record and will be expected to be paid in full.

The same applies to tax liens the IRS has filed against your property. Once this happens, it’s too late for you to discharge the debt through bankruptcy. These types of debts are “secured,” which means bankruptcy courts can’t touch them in either Chapter 7 or Chapter 13.

At the end of the day, bankruptcy may be your best option for overcoming tax debts in California. State taxes here are higher than in many other states, and federal taxes only compound the issue. If you’re ready for a fresh start today, contact Hedtke Law Group.