It’s now after April 15 so it’s no longer tax season. But if you owe income taxes, it’s ALWAYS tax season. Here’s how to escape.
1. An income tax can be discharged—legally written off forever—in a matter of about 4 months through a Chapter 7 “straight bankruptcy” if you meet just a few conditions, mostly tied to how old the tax is.
2. Even if you owe an income tax that doesn’t meet those conditions, a Chapter 7 case can discharge all or most of your other debts so that you could afford to pay off the surviving income tax through a reasonable monthly installment payment plan.
3. If you owe multiple years of income taxes, there is a good chance that through bankruptcy you could discharge some of the older taxes, as well as all or most of your non-tax debts, potentially leaving you with a small enough surviving tax debt to pay through a monthly installment plan.
4. If you have some income taxes that don’t meet the conditions for discharge, and you truly cannot afford to pay anything in monthly payments, a bankruptcy on your other debts may set you up for an Offer in Compromise with the IRS or other similar settlement offer on a state tax debt.
5. If you owe a tax that cannot be discharged, but have an asset that is not “exempt”—not protected from your creditors and the bankruptcy trustee—the proceeds of the sale of that asset by the trustee could pay that tax in part or in full.
6. If you owe some income tax that can be discharged and some that can’t, under a Chapter 13 “adjustment of debts” you could pay little or nothing on the dischargeable tax while paying the rest in full.
7. While paying the non-dischargeable (usually newer) income taxes through Chapter 13, usually you pay no accruing interest or penalties during the 3-to-5 years given to pay those taxes.
8. Under Chapter 13, taxes that meet the conditions for discharge are paid only as much as you can afford to—often very little or nothing.
9. Under a Chapter 13 case, taxes that do not meet the conditions for discharge must be paid in full, but the payment terms are mostly based on what you can afford to pay instead of on the IRS’s or state taxing authorities’ payment requirements.
10. The payments to the IRS/state under Chapter 13 can usually take full account of your other important debt responsibilities, often forcing the IRS/state to wait to get paid until you pay your home mortgage arrearage, your vehicle payments, back child/spousal support, and other personally important debts.
11. During the course of either a Chapter 7 or Chapter 13 case, the IRS and state taxing authorities are forbidden to take virtually any collection action against you or your assets, with that protection lasting about 4 months under Chapter 7 and about 3 to 5 years under Chapter 13.
12. This stops the IRS/state from garnishing (“levying on”) your paycheck and bank accounts, and from seizing your vehicle(s) and other personal property, quashing the power of these taxing authorities as if they were virtually like any other creditor.
13. A bankruptcy filing also stops the recording of a tax lien on your home, vehicle, and other possessions.
14. Stopping the recording of a tax lien can be tremendously important because a tax lien can instantaneously change a tax debt from being fully dischargeable and not paid anything into a debt that is secured by your home or other assets and must be paid in full or in part to keep your home or other assets.
15. After a tax lien has been recorded, Chapter 13 satisfies that lien very favorably by determining the value of the asset(s) to which the lien attaches and then arranging payment without undue pressure by the IRS/state.
16. A pending tax refund can be retained under Chapter 7 by waiting to file the case after receiving and appropriately spending that refund.
17. In that situation, if you don’t have the flexibility to delay filing the case, often the tax refund is nevertheless protected by property “exemptions.”
18. Under Chapter 13, if you can’t wait to file until after receiving and appropriately spending the refund, you can often get court permission to spend the refund on a special urgent expense, such as to repair a vehicle.
19. Under Chapter 13, future income refunds during the course of the case must usually be given to the trustee, but sometimes they can be earmarked for a special urgent expense, or the refunds enable you to finish the case by the 5-year deadline or to get out of the case earlier than you would otherwise.
20. Wise pre-bankruptcy planning can increase the amount of income taxes that you can discharge when you do file your bankruptcy case.