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Bankruptcy and Taxes

Posted on June 5th, 2014

While bankruptcy has traditionally been an option for Americans in Arizona and across the nation, it was mostly used by businesses since the public didn’t usually have access to debt.  However, when debt was offered to citizens after World War II, more people found they couldn’t meet their financial obligations and needed to rely on personal bankruptcy.

The federal government increased restrictions on filing bankruptcy in 2005, but consumers can still take advantage of bankruptcy to help any type of situation, even with delinquent tax debts .   Bankruptcy may be a tool to help someone during a tax audit although it will not necessarily stop an audit.  A Chapter 13 bankruptcy would stop collection efforts during the the pendency of the Chapter 13, however a portion or all of a person’s tax debts would probably need to be paid over the course of three to five years.

Not all debt can be discharged during bankruptcy and one of those types of debts that cannot always be discharged are taxes.   Other types of debt that cannot be discharged are student loans, criminal penalties, child support and certain other penalties.  Often, these types of debts can be reorganized in the context of a Chapter 13 bankruptcy, however.  Unfortunately, not filing taxes is not an option for someone wanting to file bankruptcy.   If a person filing bankruptcy hasn’t filed taxes, the bankruptcy trustee will almost certainly file a motion to dismiss that person’s bankruptcy case. While forgiveness of debt is usually taxable, an exclusion applies when someone files bankruptcy.  A tax professional would be able to advise people interested in how forgiveness/cancellation of debt can affect a person’s tax liability outside of bankruptcy.

When consumers think about filing bankruptcy, they could have a number of questions. A Phoenix bankruptcy attorney may be able to help clients find solutions to the problems of overwhelming debt.

 

Source: Fox Business, “How Bankruptcy Impacts Your Taxes“, Bonne Lee, July 25, 2013

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