Filing Bankruptcy and Taxes
Filing bankruptcy stops the taxing authorities immediately from trimming wages, seizing/ selling assets, and/or closing your business. It’ll stop them from filing tax liens among other things. Finally, it’ll usually take the matter out of your taxing agent’s hands and put it with a trained person in the bankruptcy department of the taxing authority, which may resolve a situation seemingly getting personal.
With that in mind, this is a very complicated area and depends on a TON of factors, such as the type of your taxes owed, how long those taxes were owed, who was liable for paying the taxes, whether the taxes are an automatic lien on a real estate, if the taxing authority has filed a lien, and whether you’ve filed tax returns on time or when they were filed. It depends on the time between filing the taxes then being assessed, and when the bankruptcy was filed.
Finally, it depends on the type of bankruptcy you file. It may depend on whether your ex-husband filed tax returns for you and you may claim innocent spouse protection. I’d advise you to make an appointment with a tax attorney with experience in this area and have all your facts straight regarding the above questions. Also, understand that you need to have a copy of all of your tax returns and notices from the taxing authority for any attorney to advise you properly. A change in one variable may mean if the attorney was informed correctly or not. It won’t be the attorney’s fault if you provide incorrect or incomplete information.
Generally, if you file a chapter 7 bankruptcy and the INCOME taxes are for a tax year that’s due and payable more than 3 years ago (for example, after April 15, taxes are deemed “due and payable” so, after 4/15/06 we are talking about 2002 taxes); AND if the income tax returns were filed more than two years before filing the chapter 7 bankruptcy, then those taxes can be discharged. There’s a certain requirement with how many days between charging of taxes and the filing, which must be considered to see if they’re avoidable.
Even when a debt is discharged with a chapter 7 bankruptcy, if a tax lien has been filed, then you must pay the IRS/SC/NC its guarantee (which is everything you own, minus the value of any superior liens). You may have to sue the IRS to figure out the value of what’s owed to the IRS to clear the lien. Then, of course, the SC Department of Revenue won't recognize some of these procedures.
State income taxes have the same rules.
In chapter 7 bankruptcy sales taxes and property taxes for personal property taxes are dischargeable if the chapter 7 bankruptcy is filed before the taxes are due and payable.
You have to pay withholding taxes regardless.
A few extra rules apply if you file a chapter 13 bankruptcy, all of the above rules are still the same. Remember that a chapter 13 bankruptcy plan is a way to repay debts. A dischargeable debt in a chapter 13 payment plan is when you could pay less than 100 of the balance. Also in many situations wouldn’t pay interest, tax penalties and interest usually stops after filing the chapter 13 bankruptcy.
To sum up, the same basic rules apply if you file a chapter 11 bankruptcy. You would have to pay interest on the taxes, penalties still stop and you don’t necessarily have to pay any tax payments until your chapter 11 bankruptcy payment plan is approved which could take months or more.
If filing a chapter 13, your taxes must be kept filed and current for the years in the chapter 13 repayment plan or your case could be dismissed. Also, the trustee must be sent a copy of your federal tax return for each year of the chapter 13 payment plan. Finally, all of your tax returns must be filed for the chapter 13 repayment plan to be confirmed.
