What Happens to Tax Debt When You File Bankruptcy

What Happens to Tax Debt When You File Bankruptcy

One of the biggest questions people have when they file bankruptcy is what happens to the debts. Specifically, they want to know what happens to their tax debt. It’s a reasonable question when you consider the fact that someone who can’t afford to pay off existing debts may not be able to afford to pay off a more serious tax debt either. Plus, along with medical debts, tax debt is one of the most common types of debt leading to bankruptcy. Like many types of debt, figuring out exactly how to proceed can be confusing.

Myths About Tax Debt

There are those who claim you cannot file bankruptcy on your tax debt. This isn’t exactly true, but it’s up to your lawyer to let you know which route is the best route for you to take. What is certain is that there are limits on what you can claim as part of your bankruptcy when it comes to taxes. For instance, if you have penalties to pay on your taxes, those cannot be claimed. The same is true of any fees involving fraud and taxes. However, if you just owe back taxes and can’t afford to pay the balance, you may be able to include them in your bankruptcy. There are a number of myths surrounding tax debt and bankruptcy, so it’s important that you consult a qualified bankruptcy attorney to make sure it’s handled correctly.

Splitting the Tax Year

There are two ways you can handle your taxes during the year that you file bankruptcy. You can file them as usual before you file bankruptcy, or you can split the tax year in half and file on the first half before you file bankruptcy. The difference is in how the estate itself is handled.

When you split the year, the portion you owe from the first part of the year can be applied to your bankruptcy estate. This is the estate set aside for creditors to file claims against and may involve real property. If you don’t have any assets in the estate that aren’t exempt, you cannot take the short year option. When you don’t split the tax year, the taxes owed cannot be applied to the bankruptcy estate that holds the assets.

When it comes to bankruptcy, managing taxes can be very tricky. There are many elements surrounding taxes and bankruptcy that you shouldn’t attempt to handle on your own. It’s really best to ask your lawyer exactly when you should file taxes and what you can expect to happen with your personal tax situation. After all, you don’t want to end up with tax debt just because you didn’t file your taxes or bankruptcy at the correct time of the year, and you don’t want to risk making costly mistakes. In order to move forward in the best way possible, speak with a bankruptcy lawyer.

Share this post with your friends and family members. If you have questions regarding tax debt, contact us online for a consultation.

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