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Does Bankruptcy Wipe Out My IRS Tax Debt?

IRS tax debt, bankruptcy in Chicago

Have you fallen behind in your monthly bills? Whether it’s credit card debt, missed mortgage and car payments, or additional financial burdens, are they too expensive for you to handle? Millions of Americans have financial hardships related to medical bills, unemployment, and other circumstances. You may be looking at debt relief offered by bankruptcy in Chicago. However, if you owe the government, the tax debt may or may not be discharged (wiped out) with Chapter 13 or Chapter 7 bankruptcy.

Can Chapter 13 Help with My Tax Debt?

Chapter 13 may help you manage your tax debt. If the debt is at least three years old, might be forgiven without payment and discharged. It depends on a variety of factors, including the amount of your disposable income once necessities and reasonable expenses are tallied. You don’t incur any additional penalties or interest after it’s discharged.

Although a tax lien less than three years old is typically not discharged, you may be able to satisfy it through the Chapter 13 payment plan. The IRS is obligated to abide by the plan, as are all creditors. However, the plan must include all back income tax requirements. Chapter 13 payments typically last three to five years. You must keep up your tax returns and tax payment obligations current throughout the plan.

Can My Tax Debt Be Discharged in Chapter 7?

You may be able to wipe out your tax debt with Chapter 7 in Illinois. However, not everyone qualifies for the “fresh start” option. The means test determines if you’re eligible for this type of Chicago bankruptcy. Once qualified, you’ll need meet the following conditions for federal income tax debt to be discharged in Chapter 7:

  • The taxes are income taxes
  • The tax debt is at least three years old
  • You did not file fraudulent tax returns or take action to avoid paying taxes
  • You filed the tax returns for the year(s) in question at least two years before filing Chapter 7
  • The IRS assessed the debt at least 240 days before the bankruptcy petition

Income taxes are the only taxes that bankruptcy can discharge.

Tax Levy vs. Tax Liens

A tax levy is a legal seizure of your property to satisfy a tax debt.  A tax lien is a claim or security interest against specific property. For example, if you have a mortgage, a lien may be placed on your home. A creditor can sell the property if you don’t pay the debt. A federal tax lien is similar to a mortgage. Your obligation is to the IRS instead of your mortgage lender. When the IRS imposes a tax lien, it does not get wiped out in Chapter 7 or Chapter 13 bankruptcy.

Tax Debt Consultation in Chicago

If you have questions about bankruptcy and if it can help with your tax debt, contact Benjamin Brand, LLP for a free consultation. We help clients throughout Chicagoland find debt relief options. Our office is located in Chicago’s West Loop. Although we accept consultations in person, we follow social distancing recommendations. You can schedule a consultation via phone or video conference if you prefer. Let us help you take your life back and begin rebuilding your credit.

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