It may not be the first thing that comes to mind when filing for bankruptcy, but your tax situation may affect your chapter 7 filing. Tax situations can be complex, and filers need to rely on the advice of their bankruptcy attorney, but an overview of what might happen with your taxes can still be informative.
Back Taxes and Debt Discharges
Chapter 7 has the reputation of eliminating debt in a way that is unparalleled. Unfortunately, some debts cannot be discharged and tax debts fall into that category. That is not to say that bankruptcy filers cannot get any tax relief with a filing. Older tax debts can be forgiven with chapter 7. If you owe the IRS income taxes on a return that was filed at least three years in the past, you have a chance to have that tax debt forgiven. Also, some punitive actions taken by the IRS for that old tax debt can be reversed. That means wage garnishment actions may be removed. New tax debts, however, must be paid. Moreover, you cannot obtain bankruptcy relief unless you have filed your most recent tax return.
Taxes and Priority Creditors
Not only are newer taxes owed even with a bankruptcy filing but the way the bankruptcy courts look at your taxes can affect things, too. When assessing money owed to creditors, you may order your debts by the amount owed to each entity. The bankruptcy court has its very own way of prioritizing your debts. Why does priority matter? Because it can affect how much property you lose. For example, a top priority for the courts is paying past-due tax bills. If you owe money to the IRS, some of your assets can be seized, sold, and used to pay the tax debts. On the other hand, creditors low down the priority list never get paid. Credit cards are a low-priority debt. That being said, you can protect your assets by using your state exemptions. This way of deducting an asset or a dollar amount from an asset can help you to keep your home, vehicles, and cash.
If you have back taxes, your bankruptcy situation might be a bit more complex but that doesn't mean it will be impossible to obtain debt relief. Discuss things with your bankruptcy lawyer to find out what you can do to eliminate as much debt as possible with a filing.