Contrary to popular opinion, taxes can be discharged in bankruptcy and a properly timed and structured bankruptcy can provide a much needed "fresh start." Furthermore, bankruptcy can be useful in contesting the amount or validity of a tax when other judicial forum cannot be used.
Effect on IRS & State tax obligations
Filing a bankruptcy petition is like holding a crucifix in front of a vampire. Immediately upon filing, an "automatic stay" arises, and all IRS collection action must cease. If assets are seized by the IRS before the filing of the petition but haven't been sold, the trustee can demand that they be surrendered to the estate for the benefit of the creditors. This "turnover" power can be extremely useful if the IRS has seized assets necessary for the operation of the taxpayer's business. As soon as it learns of the filing of a bankruptcy petition, the IRS posts its computer with a "bankruptcy hold" code to avoid inadvertent violation of the automatic stay.
Secured vs. unsecured
In bankruptcy, the IRS is just another creditor. It can be a secured creditor if a tax lien has been filed. Or it can be an unsecured creditor if no lien is filed. Finally, the IRS can be partially secured and partially unsecured if a lien has been filed but the amount owed exceeds the equity in the property covered by the lien.
Priority vs. non-Priority Taxes
Taxes (like other debts) are categorized as to priority. Certain taxes are given a higher priority than most other debts, effectively making them nondischargeable:
-
Taxes are nondischargeable if the return was due less than three years prior to the filing of the bankruptcy petition.
-
Taxes are nondischargeable if assessed less than 240 days prior to the filing of the bankruptcy petition.
-
Taxes are nondischargeable if the return was not filed, or was filed less than two years prior to the filing of the bankruptcy petition. (This rule applies in Chapter 7, but not Chapter 13.)
Thus, as with so many things in life, timing is everything. Tax debts which are nondischargeable today may be dischargeable tomorrow, so careful planning with an advisor thoroughly familiar with these complex rules is absolutely essential. This is an area in which it pays to be very, very careful.
Chapter 7 v. Chapter 13
While some taxes are not dischargeable, choosing the right chapter of bankruptcy can significantly help you resolve your tax situation. In Chapter 7, a discharge of your unsecured, non-priority debt may allow you teh breathing room you need to get your tax obligations paid. Chapter 13 allows you to pay your priority tax claims as part of your plan. Even better, priority taxes are paid before other debts. Finally, paying priority tax debt in Chapter 13 bankruptcy allows you to stop IRS penalties from accruing on the debts.
If you have tax obligations, don't let the IRS or Colorado Department of Revenue take your assets or garnish your wages. Bankruptcy offers a variety of solutions to your tax problems, as well as helping you deal with other debts!
