If you are struggling with debts you simply can’t pay off, you may want to file for bankruptcy. This process requires careful planning, however. There are different types of bankruptcy to choose from, and when you file will impact whether tax-related debts can be discharged. Get the details on how your tax returns are impacted by two of the most popular types of personal bankruptcy below.
What Are the Differences Between Chapter 7 & 13 Bankruptcies?
With a Chapter 7 bankruptcy filing, all of your allowable debts may be discharged within a matter of months. Note that some debts like child support can never be discharged under any circumstances. While Chapter 7 swiftly eliminates debts and gives you a clean slate, your assets may be liquidated to pay off creditors before the discharge takes place.
In contrast, Chapter 13 requires you to pay back a portion of your debts over a payment plan of three to five years before any discharge takes place. After this time period, the remaining debts are discharged. Although you have to pay off a portion of what you owe, your assets are better protected.
What Is the Impact on Your Taxes?
For both Chapter 7 and 13, any tax debts are considered a priority. If you owe back taxes, these will be addressed first and will have to be paid. In the case of Chapter 7, this may occur when assets are liquidated. For Chapter 13, they will have to be included in the payment plan.
Not all tax debts can be discharged. If the return was due at least three years ago or was filed at least two years ago or the tax assessment is at least 240 days old, it may be dischargeable. Fraudulent returns or charges of tax evasion are exceptions, and you will not be able to discharge such debts.
When dealing with the complications of filing for bankruptcy, trust The Gil Law Firm to provide the clear guidance you need. Located in Dothan, AL, Rafael Gil III and his team assist clients throughout Alabama, Georgia, and Florida. They provide honest insights and have a thorough knowledge of the law. Get an overview of their practice areas on their website, or schedule your appointment with an attorney by calling (334) 673-0100.