1-800-548-4639When tax debt becomes overwhelming, many people look for a comprehensive solution to address their financial problems. For some people, that solution comes in the form of bankruptcy. Bankruptcy is a form of debt relief that essentially wipes the slate clean, giving you a fresh financial start. However, it comes with some serious consequences.
What to Know Before Filing for Bankruptcy on Back Taxes
While bankruptcy does clear tax debt, keep in mind this will affect your credit for years. Getting a loan for a car, a house or anything else you may want will be difficult because banks will not trust your ability to repay them. In addition, declaring bankruptcy will prevent you from filing again for seven years. If you accrue additional tax debt in that time, you’ll have to pay it no matter what.
Most states require you to wait around three years before including taxes in your bankruptcy, meaning that if you want to discharge tax debt from this past year, you will have to wait a few years to do so. In the meantime, you will still have to make payments to the government to remain in good standing. Otherwise, you could face serious penalties.
Should You Declare Bankruptcy Before or After Filing Taxes?
Submitting your taxes before filing for bankruptcy can avoid financial complications and streamline the process of filing for bankruptcy. Some additional benefits of filing your taxes before declaring bankruptcy include:
- Accurate financial information: Filing your tax return before declaring bankruptcy provides you and the IRS with up-to-date information about your income and tax debts.
- Avoid disputes: Submitting your tax return gives the IRS accurate and complete financial information, minimizing the chance of the IRS challenging the true extent of your tax debt.
- Assessing eligibility: Your tax return information helps determine your bankruptcy eligibility.
- Appropriate course of action: Filing taxes can ensure you file for the correct chapter of bankruptcy.
Types of Bankruptcy
There are six types of bankruptcies, but most individuals only deal with Chapter 7 and Chapter 13 bankruptcies.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy or liquidation is individuals’ most common form of bankruptcy. Once you complete the process for Chapter 7 bankruptcy on back taxes, a court-appointed trustee will oversee liquidating your assets to repay creditors. Some tax debt may be able to be eliminated, but you are still responsible for paying student loans and tax debt that can’t be discharged.
The state where you file bankruptcy can also affect which items the court forces you to sell. For example, most states allow individuals to keep necessities like their house, car and retirement accounts. Most Chapter 7 bankruptcies are no-asset cases, which means the individual doesn’t own property or other assets with a high enough value to sell.
You can only qualify for Chapter 7 bankruptcy if the court determines you don’t make enough money to repay your debts. The court will perform a means test, comparing your income to the state average and looking at your tax return to determine if you have any disposable income to pay back your debts. If your income is too low, then you qualify for Chapter 7 bankruptcy.
Chapter 13 Bankruptcy
If you file for Chapter 13 bankruptcy, you will have a monthly payment plan so you can repay part of your unsecured debt and all of your secured debt over three to five years. Your repayment amount will vary based on your income and types of debt.
Unlike Chapter 7 bankruptcy, you will remain in control of your assets with Chapter 13 bankruptcy. Filing for Chapter 13 bankruptcy can also stop foreclosures by giving you additional time to refinance your mortgage.
Tips for Paying off Tax Debts
Bankruptcy should always be a last resort — not the first option — when you have back taxes. Some tips for paying off back taxes include:
- Installment agreements: With an installment agreement, you can pay off your tax debt in smaller, more manageable monthly payments over time.
- Offer In Compromise: With an Offer In Compromise, you pay less than what you owe to reduce financial hardship.
- Currently not collectible status: If you are in serious financial trouble, you can file for Currently Not Collectible status, which halts collection temporarily so you can regroup on your repayment strategy.
- Work with the professionals at BC Tax: Our team has years of experience helping individuals solve their tax issues and will find a solution for your back tax debt.
Choose BC Tax for Back Tax Solutions
Having back tax debt can be a stressful experience and leave you feeling overwhelmed. When you work with BC Tax, we can relieve some stress through our expert back tax service. Our licensed agents have experience dealing with bankruptcy and back taxes and will work with you to find the best solution for you. Contact us today to get the tax debt relief you need!
Authored by the BC Tax Insights Team, this article reflects the collective expertise and experience of our seasoned tax professionals. The Insights Team at BC Tax comprises specialists with a deep understanding of various tax scenarios and solutions. With a focus on providing informative, accurate, and practical insights, our goal is to guide readers through the complexities of taxation and financial planning. Every piece is crafted with the intent to help individuals and businesses navigate the ever-evolving world of taxes, ensuring clarity and confidence in decision-making.
