Many Americans struggle with paying their federal taxes. Even though you know you must pay taxes every year, you have found it impossible. People may complain about student loans, credit cards, and rent or mortgage payments, but their tax debt can be just as much of a headache.
Bankruptcy has helped many people who have found themselves unable to manage their debt, but if you are considering bankruptcy, you may have questions about your tax debt and whether or not this debt can be included.
What is bankruptcy?
Tax debt is just another financial burden that many Americans are looking to unload, making bankruptcy very appealing to those who have an ever-growing pile of debt. Bankruptcy is a legal process of eliminating or decreasing a person’s debt. There are several bankruptcy chapters available to individuals, but you’ll likely choose between Chapter 7 and Chapter 13 bankruptcy when dealing with tax debt.
Each chapter will determine how much of your debt is, what kinds of debt are, and how the debt will be reduced or discharged. For example, Chapter 7 will require the debtor’s assets to be sold to repay debts. Chapter 13 requires debtors to repay all or a portion of the debt over three to five years. Depending on your financial situation, you may not even qualify for Chapter 7.
Can you include tax debt in bankruptcy?
Your primary motivation for filing bankruptcy may be to relieve yourself of all responsibility for your debt. You may have accrued various debts over the years, but your tax debt may be the one that is the most overwhelming. Bankruptcy can give you the relief you need, but keep in mind that certain debts cannot be discharged through bankruptcy. Luckily, Federal tax debt can be included in bankruptcy, so it could be the answer to your problems when you can’t afford to pay off this debt.
Between the available bankruptcy Chapters or options, many consumers opt for Chapter 13. This specific chapter of bankruptcy does have requirements, so not every taxpayer is eligible. You’ll want to make sure you are what the IRS considers a wage earner, self-employed or sole proprietor of a business.
Additionally, if you are planning to file Chapter 13, there are a few things you will want to note about filing your taxes.
- Taxes must be filed every year during your bankruptcy.
- Taxes must be filed for every year within four of your bankruptcy.
- Taxes must be paid by the due date.
Should you file for bankruptcy?
Many people choose to file bankruptcy when they can’t afford to pay down their debt. Before opting for bankruptcy, you will need to have a clear picture of things. Consider evaluating your circumstances and financial situation, including your income, total amount of debt, expenses, and more, to determine if you truly cannot afford to pay down your debt.
Keep in mind that while filing bankruptcy may eliminate or reduce a person’s debt, the negative impacts shouldn’t be ignored. For example, filing bankruptcy will affect your credit score and your ability to obtain new credit. Before filing for bankruptcy, consider the effects, how long they will last, and what plans you may have for your financial future that may have to be put on hold until you recover from bankruptcy.
Ultimately, it is up to you if you wish to file for bankruptcy. It is understandable that when your debt becomes overwhelming, you will start to consider the many ways you can get relief. If bankruptcy is the ideal solution for your situation, then you should be debt-free in a matter of years.
Have questions about how bankruptcy may affect your credit or how you can recover from bankruptcy quickly? Schedule a free consultation with us today!