We all know there are two things that are certain in life: death and taxes. Well, it seems as though the progenitor of that ancient phrase may have to revise it, because with modern bankruptcy, some types of unpaid taxes can be done away with. One of the great benefits of filing for bankruptcy is that it can relieve a debtor not only of impossible debt, but of many old taxes as well. However, because of the divide between state, local and federal taxes, actually alleviating these taxes can be quite a complicated affair and even the best of attorneys can have a hard time determining exactly which taxes are affected and which are not. “Basically what I tell my clients,” says Robert Canning, a Los Angeles, CA based bankruptcy attorney, “is that the IRS works in mysterious ways.”
According to Canning, though, the fact of the matter is that most taxes filed and remaining unpaid for more than three years prior to the date of filing for bankruptcy are dischargeable. This is important to note, as any taxes that remained unpaid during that 3 year time period are known as priority debts and do have to be paid. However, the amount or percentage of tax that is dischargeable does depend on which type of bankruptcy you are filing. Whereas with Chapter 7 you may be able to discharge all of your taxes, Chapter 13 may only grant you the ability to discharge a certain percentage of your owed taxes. Furthermore, with Chapter 13, it can depend on whether your tax debts are considered secured or unsecured. Unsecured debts may be dischargeable up to a certain percent but if, for instance, there has been a lien against your property, then that is considered to be a secure debt within the law and must be paid in full.
Furthermore, taxes are only dischargeable provided that the person filing for bankruptcy filed them on time and did not make any attempt at fraud by lying on his taxes or by engaging in willful evasion. There is also something known as the “240-day” rule, which mandates that the debt must be assessed within 240 days before an individual files for bankruptcy, or else it is not eligible.
Finally, there are some taxes which are not eligible for discharge, such as payroll taxes or fraud penalty taxes.
The lesson to learn is that while taxes may be dischargeable under bankruptcy, it is not a cut and dry issue. To get the most of your bankruptcy filing, it’s imperative that you seek out an experienced attorney who is well-versed in tax laws as well.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.