Curious as to how filing for bankruptcy will impact your status with the IRS? Holly H. Hines, a bankruptcy attorney serving Worcester County, Massachusetts, explains whether you will still owe taxes if you file for bankruptcy.
Whether a person will still owe the federal government taxes if he files for bankruptcy depends on a lot of things. Some taxes can be avoided if they are at least four years old, but certainly not all types of taxes are included in that.
Some old income taxes, for the most part, and some taxes for businesses can be discharged. But real estate taxes, unfortunately, will generally have to be paid. If they aren’t paid, then the town where the real estate is located will come after the property.
So when it comes to real estate taxes, you generally can’t avoid paying those no matter how old the taxes are, because real estate taxes are known as a ‘priority tax’ and they have to be paid.
But for the most part, many types of old taxes including income taxes and some business taxes, may be able to be avoided as long as they are old enough to count under a bankruptcy filing.
For the taxes that still are owed, though, we can generally structure those payments in a way so that the debtor will pay back the taxes that are still owed in a manageable way given their current financial situation.
If the debtor is filing a Chapter 7 bankruptcy, then that means we will not have a payment plan option available to us like we would with a Chapter 13 filing. So in that case, we would most likely advise the client to set up a payment plan arrangement directly with the taxing authorities — either the IRS or, in the state of Massachusetts, the Massachusetts Department of Revenue.
Based on the payment plan that the client has set up, he would end up paying those taxing authorities separately from everything else in his bankruptcy case, since the payments would be going directly to the authorities themselves. And then from there, we would go ahead with filing the Chapter 7 bankruptcy and take care of the rest of the debts that are dischargeable at that point. Because, once again, if the income taxes are not at least four years old, then they are not going to be dischargeable.
Now, if a person is planning to file a Chapter 13 bankruptcy, then that changes matters. If he is making the filing for other matters—such as to catch up on things like automobile payments or mortgage payments—then that allows us to use the Chapter 13 payment plan that is already in place to help him arrange payments for his taxes, as well.
In a Chapter 13 filing, it may make sense for us to roll any income tax or any arrears that a client already has into the bankruptcy plan we are putting together, so that they can make one payment a month to the U.S. Trustees Office to pay back all of their debts, rather than sending payments to each creditor separately. And the IRS would be included in that.
So the point of a Chapter 13 payment plan in that case would be to kind of consolidate a client’s debts into one plan and makes it easier for him to just send in one payment each month. In most cases, that makes debt repayment much easier for the clients we see.
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.
