Sometimes life throws unexpected challenges at you that result in costly consequences. Economic conditions beyond your control can force your employer to lay off employees. You or a loved one could also suffer an unforeseen injury or illness, eating up a substantial part of your budget.
Life can happen to the economically prudent and casual alike. Sometimes people have the misfortune of experiencing a series of unlucky events, causing them to incur substantial debt. Fortunately, U.S. bankruptcy law provides people with a legal remedy to halt the spiral of debt before it spins out of control.
This article explains how certain debts are discharged if you file for bankruptcy under either Chapter 7 or Chapter 13 of the bankruptcy code.
Bankruptcy Under Chapter 7 and Chapter 13
Filing for either Chapter 7 or Chapter 13 bankruptcy acts like an emergency brake for a runaway train. By filing for bankruptcy, the petitioner avoids incurring greater debt and gives them the opportunity to repay their existing obligations to creditors.
Under Chapter 7, the petitioner’s assets are temporarily controlled by a court-appointed “trustee in bankruptcy.” A Chapter 7 bankruptcy trustee can liquidate your assets to satisfy outstanding debts. In contrast, under Chapter 13, the petitioner’s assets are not placed in trust with the bankruptcy court. Instead, the court overseas a repayment plan based on your current level of income.
Filing for bankruptcy initiates an automatic stay on any legal action to collect on your debts. In other words, creditors cannot take further action to collect on your existing obligations while bankruptcy proceedings are in effect. The Interest on obligations will not accrue during the automatic stay.
Another important consequence of filing for bankruptcy relief is that certain debts are discharged (wiped out) by the time proceedings are complete. Obligations that qualify as “priority unsecured debt” are generally not dischargeable. Debts such as alimony, child support, and tax obligations are priority unsecured debts. However, certain tax obligations may be discharged in bankruptcy.
You can discharge debts for federal income taxes under a Chapter 7 or Chapter 13 bankruptcy if they meet the following requirements:
- Taxes are Income Taxes. Taxes other than income, such as payroll taxes or fraud penalties, cannot be eliminated in bankruptcy. If you filed a fraudulent tax return or otherwise intentionally evaded taxes, bankruptcy discharge will not work.
- The debt is at least three years old. To eliminate an IRS debt, the tax return must have been originally due at least three years before you filed for bankruptcy. For example, the 2017 taxes would become due on April 15, 2018. To receive a discharge in bankruptcy for 2017 taxes, you would generally have to wait until after April 15, 2021.
- You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
- You pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)
- If the IRS filed a lien, the debt becomes secured on any property you own. This generally means that even if you received a discharge in bankruptcy, the IRS lien is not voided and the lien will remain on your property after the bankruptcy.
Consult an Experienced Fishkill Bankruptcy Attorney Today
At the office of Michael A. Fakhoury, ESQ., PC, we understand how overwhelming financial trouble can be. There is a certain stigma associated with the notion of filing for bankruptcy. However, monetary problems and debt issues can happen to anyone regardless of how careful and prudent you are with your personal finances. Our legal team is here to guide you through each step of the process to make sure you understand how the bankruptcy procedure can benefit you, and what the full extent of your responsibilities during and after the bankruptcy process are.
To arrange a free consultation with an experienced Fishkill bankruptcy attorney, call the office of Michael A. Fakhoury, ESQ., PC or contact us online today.