Chapter 7 Tax Bankruptcy
CHAPTER 7 BANKRUPTCY EXPLAINED
Generally, a person files for Chapter 7 bankruptcy if they are overwhelmed with debt and want to get a fresh start. In Chapter 7, the debtor surrenders their assets (that are not exempt under bankruptcy law)to the court and those assets are used to satisfy the claims of creditors. The debtor is discharged from all dischargeable debts and creditors can no longer attempt to collect on these discharged debts.
Not everyone may qualify for Chapter 7 bankruptcy, however. In order to determine if bankruptcy is the right approach for you, you need to evaluate:
- Whether your income under the Means Test is such that you are eligible for Chapter 7.
- Whether your debts are the kind that will be discharged in bankruptcy.
In order to be meet the means test to be eligible for Chapter 7, your income for the six months prior to the date of the filing must be below the median income of your state. If your income is below the median, you are eligible to file for Chapter 7 bankruptcy. If your income is above the median, you may still be eligible if you can show that after you pay all necessary living expenses, you have no disposable income left to pay your debts.
DISCHARGING TAXES IN CHAPTER 7 BANKRUPTCY
Whether tax debts can be discharged in a Chapter 7 bankruptcy is often a complicated answer that should be determined by a tax bankruptcy professional.
A classification of taxes known as Priority Taxes cannot be discharged in Chapter 7. Generally, income taxes are priority taxes if they meet either of two tests found in the bankruptcy law— the Three Year Rule and the 240 Day Rule.
- Under the three year rule, if the tax return due date for the particular income tax year was less than three years before the bankruptcy is filed, then it is a priority tax, or if an. extension was filed, the three year rule is calculated from the date of that extension.
- Under the 240 day rule, if the income tax was assessed within 240 days before the bankruptcy is filed, then it is a priority tax.
Other Priority Taxes include federal withholding and withheld FICA taxes and sales tax. Anything not a Priority Tax may be discharged in Chapter 7.
Even though income taxes may not qualify as priority taxes, they still might be excepted from discharge for other reasons.
- Late filed tax returns: The taxes related to a tax return that was filed late are not dischargeable if the return was filed within two years before the bankruptcy case was filed.
- No tax return filed: The taxes related to any unfiled tax return that should have been filed, are not dischargeable.
- A fraudulent tax return: The taxes related to a fraudulent tax return are not dischargeable.
Chapter 7 can provide relief from many types of debt, including tax liability, but it is not something to be done without careful consideration and planning.
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