If you are thinking of filing for bankruptcy, you are not alone. Many Americans are finding themselves struggling to make ends meet and more and more are choosing to seek relief through bankruptcy. Recent data finds that the rate of bankruptcy has increased by almost 20%.
The vast majority of these filings are not the result of poor or reckless spending but unforeseen or surprise expenses. One potential surprise expense that could lead to debt: taxes. Whether dealing with a surprise or unmanageable tax bill, it is wise for taxpayers to consider whether bankruptcy could help them find their financial footing.
One of the first steps in this conversation is to gain a basic understanding of bankruptcy options. There are many forms of bankruptcy, but the most common are Chapter 7 and Chapter 13. Key distinctions between the two include the following:
- Chapter 7 Bankruptcy: Often referred to as liquidation bankruptcy, Chapter 7 allows for the discharge of many debts, including certain tax obligations.
- Chapter 13 Bankruptcy: This type is a reorganization bankruptcy for individuals, which includes a repayment plan.
It is possible to use a petition for relief through bankruptcy to help manage tax debt, but approval is contingent upon several criteria.
When can a taxpayer get relief from tax debt through bankruptcy?
The answer will depend on the type of tax, the age of the tax debt, and the chosen chapter of bankruptcy. There are situations where a taxpayer could receive a discharge for income taxes through a Chapter 7 bankruptcy while a Chapter 13 may result in a more manageable repayment plan spread over a specified length of time.
What are my next steps?
It is important to reach out to a legal professional with experience in this niche area of law. A bankruptcy attorney can review your situation and discuss the benefits and risks of filing for bankruptcy to address tax debt.
Bankruptcy can provide a fresh start for those overwhelmed by debt, but it comes with complex implications for tax obligations. Whether considering Chapter 7 or Chapter 13 bankruptcy, it is important to understand the overall impact on your financial situation. By staying informed and consulting with professionals, you can navigate these challenges more effectively and better ensure a more stable financial future.