Does Bankruptcy Clear Back Taxes?

BJ Lynch
Expert Contributor
Last Updated:

Last Updated on

  • Research and understand what bankruptcy is.
  • Carefully consider all options available to you concerning tax debt.
  • Solvable is your home base for all things taxes.

Taxes are just a way of life and should be maintained to prevent issues such as tax debt. Sometimes there is no way to avoid tax debt, but there are ways to resolve outstanding debts with the Internal Revenue Service (IRS) or your state revenue service.

This is where Solvable comes into play offering the knowledge and services you need to find tax professionals suited to handle all of your tax problems.

The basic definition of bankrupt is when a person or organization cannot pay outstanding debts by a declaration of law. The United States Bankruptcy Code outlines bankruptcy. Does bankruptcy clear tax debt? Let’s delve deeper into what bankruptcy is and how it influences tax debt.

Chapter 7 Bankruptcy

Chapter 7 is one of the most common forms of bankruptcy. Often referred to as liquidation, this is the most filed type of bankruptcy. Businesses can file Chapter 7 but only with the intent of liquidating their assets and ceasing business permanently. When filed as an individual, a trustee will collect your nonexempt assets. Once these assets are obtained they are reduced to cash and distributed to the creditors. You should only consider this option if there isn’t any hope you will be able to repay any debts you may owe.

Does Bankruptcy Clear Back Taxes?

In most cases, when your Chapter 7 bankruptcy has concluded, you may receive a discharge that releases you from any personal liability regarding specific dischargeable debts. This is all determined by the unique circumstances of each case.

See More >> This Guy Resolved His $8,597 Tax Debt - Learn His Methods!

Chapter 9 Bankruptcy

Chapter 9 bankruptcy’s purpose is to give protection to a financially distressed municipality from any creditors. This protection is allowed so the municipality can work to develop a plan to adjust its debts. Chapter 9 will not allow a municipality’s assets to undergo liquidation or distribution of the assets to creditors.

Towns, cities, villages, counties, municipal utilities, school districts, and tax districts all fall under what is considered to be a municipality. A municipality is the only entity able to file for Chapter 9. The expectations placed on a municipality after filing is for it to restructure and to devise a plan of repayment.

Chapter 11 Bankruptcy

Chapter 11 is also known as a reorganization. Commercial enterprises commonly use Chapter 11 bankruptcy. It allows for business operations to continue as creditors are repaid via a court-approved reorganization plan. After being filed, there is a 120-day window in which the debtor’s reorganization plan will need to go through disclosure with the creditors.

The creditors can evaluate the plan, but it falls solely on the court to approve the proposal. The primary goal of filing is to bring the business back to a state of profitability. The key for Chapter 11 to work is to make every effort to avoid any additional debt.

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 Chapter 12 Bankruptcy

Chapter 12 is intended for family farmers and fishermen that bring in a regular annual income. Chapter 12 requires the debtor to submit a plan to repay their debts throughout a three to five-year period. There is a trustee appointed to the debtor to manage this process and is responsible for disbursing payments to the creditors. The family farmer or fisherman is unimpeded in regards to operating their businesses.

Chapter 13 Bankruptcy

Chapter 13 requires that you maintain a steady source of income, are willing to pay your debts, and that you can’t presently repay your debts. In most cases but not always, the debtor is allowed to retain a precious asset such as their house. The debtor has to design a plan detailing how they intend to repay creditors within a three to five-year period and present it to the court.

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If approved, a trustee is appointed to the debtor which handles all payments to the creditors. Choosing Chapter13 over Chapter 7 may be in your best interest if you owe debts that are not dischargeable through Chapter 7. These debts can be taxes, child support, liens that are greater than the assets securing the deficits, taxes that have not been filed for an extended amount of years, late bills, or available exemptions that aren’t enough to cover your assets.

Chapter 15 Bankruptcy

Chapter 15 provides a means by which cross-border insolvency cases can be handled. This applies when an individual or a business has connections to assets in more than one country. The sole purpose of Chapter 15 is to foster cooperation between the United States court system and whichever foreign court system that is involved. This cooperation also extends to all foreign authorities that may be relevant in a cross-border insolvency case.

Does Bankruptcy Clear Tax Debt?

All the different types of bankruptcy can be overwhelming to think about but having a basic understanding of what bankruptcy is will help you determine if it is the best course of action to take when working to clear tax debt. Tax debt has a certain persistence about it, making it difficult to resolve in a way other than paying the debt.

There have been circumstances where bankruptcy has helped those looking to clear tax debt. Lots of factors come into play when taking this approach. The dates that your required returns were filed. How old the taxes are. The most recent date that the taxes were assessed by the IRS or your state revenue service. Last but not least is your determination to pay the debts you owe. The bottom line is that bankruptcy can help clear tax debt but may not clear it entirely. Tax debts are highly subject to timeframes, and there are those that are just not dischargeable.

In the world of taxes, staying current on all your tax obligations is by far the best thing to do. If you have tax debt weighing you down, don’t give up. Take the initiative and use Solvable to seek out the help you need. It’s as simple as clicking the right link.

 

See More >> Trustworthy Tax Relief Companies + Customer Reviews

BJ Lynch
Expert Contributor
Last Updated: