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Can bankruptcy ease tax debt?

Home » Bankruptcy » Can bankruptcy ease tax debt?

As the old saying goes, taxes are one of the only things guaranteed in your life. And while you may accept that you must give part of your income to the government, life sometimes makes giving away that money difficult. Whether you had unexpected medical bills or just struggled to pay for food and shelter, you may be behind on IRS payments.

But if you can’t afford to pay for your life now, how will you ever catch up on past due debts? You may be looking at bankruptcy as a way to ease your burden. But will it offer you relief for your back taxes?

How can I get rid of unpaid tax debt?

When you file for bankruptcy, you submit to the court all your debts, including any back taxes. You also choose the type of bankruptcy you want to use. In Chapter 7, the court liquidates your extra possessions, letting you keep your house, car, clothes and a limited number of assets. Then they decide how much of this goes to each creditor. The court wipes away any remaining debt with some exceptions, including student loans, child or spousal support and tax debt.

However, if the tax debt is old enough, the court may be able to get rid of it. Unpaid taxes that are over three years old can qualify for bankruptcy discharge. This action can leave the person with a smaller amount to pay the IRS.

Adding back taxes into a payment plan can make them easier to pay

The other most common bankruptcy you can file for is a Chapter 13. In this type, the court collects all your debt into a three-to-five-year repayment plan. You only pay one lump sum every month, and the court distributes it to your creditors. Your unpaid taxes can be part of this payment, simplifying the way you pay off your bills.

Once you complete your payment plan, you may qualify for a discharge of any remaining debt. Like Chapter 7, your unpaid taxes must follow specific guidelines before a court can wipe them away.

A bankruptcy may ease or prevent IRS penalties

Overwhelming debt can be stressful to deal with. But if you don’t pay your taxes, the IRS can take severe actions, including putting a lien on your house or possessions. If you find yourself struggling to pay off the government, you may be able to use bankruptcy to your advantage.