Can Tax Debts Be Simply Eliminated Through Filing For Bankruptcy?

There are many ads on the TV and radio that claim tax debts can simply be eliminated through filing for bankruptcy. Unfortunately, this is not always true.

Income tax debts are able to be discharged in Chapter 7 bankruptcy if all of the following is true:

• All tax returns for the tax debt you're seeking to discharged must have been filed at least two years before filing for bankruptcy.
• The tax debt must have been due at least three years prior to filing your bankruptcy petition. 
• You must have filed a return for the tax at least two years prior to filing your bankruptcy petition. 
• The income tax debt has to have been assessed by the IRS a minimum of 240 days prior to filing your bankruptcy petition. 
• If a fraudulent tax return was filed or you attempted to evade paying the taxes by, for example, using a false Social Security number, bankruptcy won't be able to eliminate this debt. 

Certain events like a prior bankruptcy or an offer-in-compromise with the IRS can toll (stop) the running of these time periods. There are entire books written on how to interpret the rules for discharging a debt in bankruptcy. Be sure to obtain competent advice.

Unfortunately, even if you qualify to have your tax debt eliminated, your bankruptcy will not rid you of prior tax liens. If the IRS placed a lien on your property before bankruptcy was filed, the lien remains. This requires the debtor to satisfy the balance before they are able to sell the property. If the tax lien does not attach to any property, the IRS may abate (remove) the lien.

For more information regarding your specific situation, contact Minnesota Bankruptcy Attorney Gregory J. Wald at 952-921-5802 or at BankruptcyMinn.com for a consultation.

What To Do Before Considering Debt Settlement In Minnesota

If you are contemplating settling your debts with a creditor or a third party, rather than filing for bankruptcy, you may want to think again. For those who have the funds available to settle those debts, you may incur steep financial consequences.

As an example, if a debtor has $40,000 in credit card debt and has an IRA or 401(k) to draw from, withdrawing $20,000 to settle that debt could seem like a logical way to use the funds. BUT you could actually create more financial hardship as a result of a seemingly logical deed.

For starters, withdrawing money from an IRA or 401(k) will likely result in unnecessary taxes and penalties for early withdrawal. The other issue that would likely arise is the settlement of the debt. What you may not realize is that forgiveness of a debt is considered taxable income. So, the $20,000 that you thought you were off the hook for will now result in you receiving a 1099 from your creditor and paying taxes on $20,000 additional income.

Had bankruptcy been filed, most likely your debt could have been discharged without having additional financial consequences. During bankruptcy, your IRA and 401(k) could have been protected from creditors. Before considering debt settlement, contact Minnesota Bankruptcy Attorney Gregory J. Wald at 952-921-5802 for more information on the best options that suit your scenario.

Gregory J. Wald, Attorney at Law
1500 Northland Plaza
3800 American Boulevard West
Bloomington, MN 55431
Telephone: 952-921-5802
Toll Free: 1-866-747-1130
Fax: 952-831-1346
BankruptcyMinn.com
Gwald314@msn.com