Can I get rid of my tax debt in bankruptcy?

The answer is, it depends.  It depends upon what kind of taxes you are attempting to discharge in bankruptcy but if you mean income taxes then yes you can discharge them in bankruptcy.  Income tax dischargeability in bankruptcy is determined to just a few rules.

3 year rule

Taxes are dichargeable 3 years after they were due if there were no extensions..  If the taxes were due for the 2008 tax year in April of 2009 they would be dischargeable 3 years later after April 15th of 2012.  If you received an extension until October 2008 then they would be dischargeable in October 2012.

2 year rule

Taxes are dischargeable two years after the return was actually filed.  So 2008 taxes filed in April of 2009 would be dischargeable in April of 2011.

240 day rule

If you had income taxes assessed by the IRS the 240 day rule applies.  These taxes are dischargeable 240 days or 8 months after they were first assessed by the IRS.  Assessments often come after an audit of your taxes or if the IRS denies one of your deductions and then assesses you a greater tax.  If you wait until 8 months after these taxes are first assessed then they are also dischargeable in bankruptcy.

Other taxes

Most people have state or federal types of taxe issues but there are other cases.  If you owe sales taxes,  payroll taxes or withholding tax for employees for instance then those taxes are not dischargeable.  The IRS (or California State Franchise Board in California) consider these non-dischargeable because they were supposed to be withheld by the employer.  Many businesses rn into this kind of tax and it cannot be discharged in bankruptcy unfortunately.

Tax Fraud

If your tax return was made fraudulently or made to willfully evade taxes then those taxes would be deemed non-dischargeable in bankruptcy according to section 523 of the bankruptcy code.  This code section covers all of the exceptions to discharge.

Tax liens

If a tax lien was filed against you for failure to pay the tax then that lien does not get wiped out in the bankruptcy.  It remains after the bankruptcy.  So for example if the IRS put a tax lien on your house then it would not be extinguished by your chapter 7 bankruptcy.

You also need to be sure also that what you owe to the government is a tax.  If it is considered a “fine, fee, or penalty or forfeiture payable to and for the benefit of a governmental unit” then it is not dischargeable.  This is from section 523(a)(6) and this section is referring to things  like traffic tickets, parking tickets, court imposed penalties and fees.  Just make sure your tax is a tax and not one of these fines or penalties.

So most of your income taxes are dischargeable if they are old enough.  Have your attorney look at them careful to make sure they are.  You can always wait to file until they age if need be.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

What debts are not dischargeable in bankruptcy?

The most common types of non-dischargeable debts are student loans, government fines and fees and some taxes, spousal and child support.  There are other categories such as debts incurred due to fraud but these are much less common.

Student loans– These debts are almost always not dischargeable.  Whether they are government backed student loans or loans from a private agency they are not dischargeable.  The 2005 BAPCA law saw to that.  Loans issued “for any educational purpose” are now all non-dischargeable in bankruptcy and student loans will pass through the bankruptcy unaffected and you will have to pay them.

There is a hardship discharge for student loans in bankruptcy but it is very hard to get.  To get a hardship discharge of student loans your attorney would have to bring an adversary proceeding in bankruptcy court.  This amounts to a mini-trial where all the facts of the hardship would have to be proven.

It is expensive and time-consuming to bring such a s case and there is no assurance that you will win.  In fact it is apparently very hard to win one of these trials at all.  There are stories of judges looking at a disabled debtor and telling them that they though they cannot work any more in their field, they could teach and earn money to pay the student loan back that way.

Government fines, fees, penalties, and some taxes– If you get a traffic fine or criminal fine levied by a court or other government agency then those fines are not dischargeable in bankruptcy.  That is easy but taxes are more difficult.  The main rule for taxes is the 3 year rule that states that 3-year-old income taxes are dischargeable in bankruptcy.

So in 2012 (after April 15th)  income taxes for 2008 would be dischargeable.  This is because these taxes were due in april of 2009.  Both state and federal  income taxes are dischargeable in bankruptcy if the meet this 3 year rule.  There are other rules too but this is the main one that applies to most people.

Other types of taxes are not dischargeable so consult with an attorney for advice on your tax situation.

Spousal and child support– Forget about discharging these.  You will have to pay your ex-spouse or your children after you get a support obligation levied against you.

Fraud– Debts where fraud is proven will not be dischargeable.  If you get sued and the plaintiff alleges fraud then you want to fight these cases because bankruptcy will not save you from having to pay.  The normal credit card suit usually will not contain a fraud allegation but credit card companies can allege fraud in a bankruptcy.  This usually occurs if you have very large recent charges on your cards for cash advances or luxury items.

If you have such charges then tell your attorney so he can wait some time to file or advise you on the possible consequences if you do file right away.

The good news is that if your debt does not fall into one of the non-dischargeable categories then it is probably dischargeable in a bankruptcy!

For more info. check out my websites at:   www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office to speak toe for free about any bankruptcy or debt related issue  at (619) 702-5015.  Call now for free credit report and analysis!  I am a San Diego bankruptcy lawyer.  For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.