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Discharging tax debt via Chapter 7 bankruptcy

This time of year, many individuals find themselves looking forward to receiving their tax returns. Others, however, may wind up owing significant amounts of money on their taxes. This can be stressful for anyone, but it can be especially worrisome if you are already saddled with significant levels of debt. After all, at a time when you are trying to reclaim your financial stability, the last thing you want is to come out of the process with a large tax obligation.

Fortunately, in some circumstances certain tax liabilities may be discharged via bankruptcy. Tax debts are most often dischargeable in Chapter 7 bankruptcy, as in a Chapter 13 bankruptcy they will need to be paid back, just like other debts. Yet, in order for the tax obligation to be dischargeable under a Chapter 7 claim, certain requirements must be met.

First, the tax debt can only come from income taxes. Therefore, those obligations that arise out of payroll taxes, for example, are non-dischargeable. Second, in order for the debt to qualify, you must have filed a legitimate tax return, and the tax debt must be at least three years old. If you failed to file a return, then the debt arising out of that tax year will be disqualified from discharge. Third, the tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy claim. Lastly, you must not have committed tax evasion or tax fraud.

Bankruptcy can be stressful, scary and overwhelming. But, if you hang in there and ensure that you are prepared, knowing exactly what you want out of the process, you can come through the other side with a significant burden lifted and ready to begin your new financial life.

Source: FindLaw, "Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy," accessed on Feb. 15, 2016

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