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How can Chapter 7 bankruptcy affect tax debt?

Wisconsin residents who are facing overwhelming financial challenges may feel like they are being hit from all directions. In an attempt to pay off bills, they may have to forego necessities, take on another job or accumulate additional debt. Wages may even be garnished and income tax returns withheld. Fortunately, these individuals may be able to find relief and a fresh financial start by filing for Chapter 7 bankruptcy. However, there are several issues that must be addressed before that new beginning can be secured.

Unpaid federal taxes, for example, may become an issue even when filing for Chapter 7. This can be significant, since Chapter 7 is known as liquation, meaning that a filer will sell off his or her assets to sell off debts with the expectation that all remaining debts will be discharged. However, if tax liabilities are not forgiven, then Chapter 7 may be of little help. So, how does an individual qualify to have his or her tax liabilities discharged under a Chapter 7 bankruptcy?

In order to qualify, several elements must be met. First, the bankruptcy filer must be seeking to discharge only income tax debt. Second, a legal and valid tax return must have been filed at least two years prior to filing for bankruptcy. Third, the tax debt owed must be at least three years old. Fourth, the Internal Revenue Service must have assessed the outstanding liability at least 240 days prior to filing for bankruptcy. Lastly, the filer must not have committed willful tax evasion or tax fraud.

These rules apply for federal tax debts. Those who have questions about how bankruptcy can help them eliminate debt and how it may affect their tax obligations, whether federal or state, should consider speaking with a legal professional who may be able to provide them with information and guidance.

Source: FindLaw, "Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy," accessed Oct. 12, 2015

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