In today’s financial climate, many families are finding it difficult to keep up with rising costs and stagnant wages. While the IRS has reported over $1 billion in collected past-due taxes in 2024, Americans still owe hundreds of millions of dollars in back taxes. These taxes are pushing the people of California and people all across the country into often insurmountable debt.
One often-overlooked option to address tax debt is bankruptcy. Although bankruptcy is often viewed negatively, it can offer a fresh financial start. By understanding how bankruptcy can help tackle tax debt, you can make informed decisions about your financial future.
How Chapter 7 and Chapter 13 Bankruptcy Address Tax Debt
We guide clients through both Chapter 7 and Chapter 13 bankruptcy in Moreno Valley, California. Each of these filings offers different solutions for managing tax debt.
Chapter 7 Bankruptcy: In many cases, older tax debts can be completely discharged under Chapter 7, meaning you are no longer responsible for paying them. If your tax debts meet certain criteria, you may be eligible for this form of relief, eliminating a significant financial burden once your case is finalized.
Chapter 13 Bankruptcy: Chapter 13 provides a structured plan to pay back tax debts over time, usually within three to five years. This repayment plan is designed to be more manageable than dealing directly with the IRS, and it allows you to avoid accruing additional interest. As long as you stick to the payment schedule, your tax debt can be resolved by the end of the plan.
Temporary Relief Through an Automatic Stay
One immediate benefit of filing for bankruptcy is the automatic stay, a court-ordered injunction that temporarily halts debt collection efforts, including those by the IRS. This means that while your bankruptcy case is being processed, the IRS cannot demand payments, file liens, or garnish your wages. The stay gives you breathing room to organize your finances without pressure from creditors.
However, the IRS can request the court to lift the stay, but this requires a valid reason and court approval. While the automatic stay offers temporary relief, it is not a permanent solution and depends on the outcome of your bankruptcy case.
What Tax Debt Is Not Dischargeable?
It’s important to understand that not all tax debts can be discharged through bankruptcy. For example, more recent tax debts are typically not eligible for discharge, and the IRS will still expect repayment. Generally, tax debts that are at least three years old may qualify for bankruptcy, while newer debts will remain your responsibility.
Additionally, if the IRS has filed a tax lien against your property, bankruptcy will not eliminate that lien. Secured debts, like those associated with tax liens, are protected from discharge in both Chapter 7 and Chapter 13 bankruptcy.
Seek Financial Freedom with Hedtke Law Group
If you’re struggling with tax debt, bankruptcy could provide the fresh start you need. California’s high state taxes, combined with federal taxes, make managing debt even more difficult for residents. If you believe bankruptcy may be the solution for your tax issues, contact Hedtke Law Group today to discuss how we can help you take control of your financial future.