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Chapter 7 is often referred to as “straight bankruptcy.” This gives the impression that all of your debts will be eliminated. You’ll walk away with a clean slate.
Depending on the types of debts you have, this may or may not be the case. In Chapter 7 bankruptcy, debts are classified as either dischargeable or non-dischargeable.
- Dischargeable debts are those that are eliminated. These include most consumer debts such as credit cards and medical bills, and older income taxes.
- You remain obligated to pay all non-dischargeable debts. These debts include student loans and child support.
Are Taxes Dischargeable?
Income tax debt that meets specific criteria may be dischargeable.
Unfortunately, other taxes are non-dischargeable. They will not be eliminated in a Chapter 7 bankruptcy.
Eliminating Income Tax Debt in Chapter 7
There are strict criteria for eliminating income tax debt in a Chapter 7 bankruptcy. Some of the requirements include:
- The income tax debt must be at least three years old.
- You must have filed an income tax return. The tax debt is never dischargeable if the IRS or the Minnesota Department of Revenue filed the return for you.
- When the tax authority files the return for you, it is called a “service-filed return.”
- You cannot have committed fraud or tax evasion in relation to your debt.
- This is rare, forgetting a 1099 from a 401(k) loan is not tax fraud, tax fraud is usually more serious things like hiding your income or straight lying about it.
- 240 days must have passed between your debt being assessed and your bankruptcy filing. How do you know when the tax debt was assessed? You have to get tax transcripts.
- To get IRS transcripts, you can visit this website.
- To Minnesota transcripts, you must use this form and pay a $5 fee to the state of MN.
There may be other requirements for successfully eliminating income tax debt. A qualified bankruptcy attorney can assess your situation and let you know if your income taxes are dischargeable.
What About Minnesota Income Tax from the Minnesota Department of Revenue?
Minnesota income tax is also dischargeable with the same rules. Usually, the most important two rules are that the taxes are old enough to be discharged, and that the IRS or MN Department of Revenue did not file the tax return for you.
What if I Have a Tax Lien on My Property?
If you owe back income taxes, the IRS or the Minnesota Department of Revenue may put a tax lien on any property you own. If the tax lien was placed before you file for bankruptcy, and the taxes are discharged, then the lien stays attached only to property that you had before the bankruptcy filing.
How long does a tax lien last? There are exceptions, but the general rule is that they last 10 years from the date that the taxes were assessed. If the tax return was filed at the normal time (before the middle of April), then the taxes are generally assessed in the June follow the filing of the tax return. The best way to learn the exact day of tax assessment is to look at the tax transcripts.
Qualifying for Chapter 7 Bankruptcy in Minnesota
Older income taxes are dischargeable in bankruptcy, right? So who qualifies for the simpler, faster, and cheaper chapter 7 bankruptcy? In Minnesota, there are income limits for Chapter 7.
If your income is too high for Chapter 7, you may be eligible for a different type of bankruptcy called Chapter 13. Tax debt is handled differently in this type of bankruptcy. Chapter 13 bankruptcy discharges the same taxes as chapter 7, but also requires you to set up a 3 to 5-year payment plan for the taxes that were not discharged in the bankruptcy.
The Silver Lining After Chapter 7
If you file for Chapter 7, your credit cards and medical bills are usually dischargeable. That means that any income you had been putting towards these debts can now be used to pay off any debt for recent taxes that were not discharged in the bankruptcy.
Filing for Chapter 7 frees up more of your money and gives you some breathing room. You’ll be able to set up a realistic budget that includes paying down your tax debts.
Experienced Twin Cities Bankruptcy Attorneys
Tax debt and bankruptcy are a complicated area of the law. You need an experienced attorney to assess your situation. At Walker & Walker, we’ll help you make sense of your debts, including any outstanding taxes. We’ll help you determine if you qualify for Chapter 7 or Chapter 13, and which type of bankruptcy would be most beneficial for your situation.
Time is of the essence when it comes to assessing income tax debt. While your income tax debt must be at least three years old, you want to avoid tax liens if you can. One of our attorneys can let you know not only if, but when, filing for Chapter 7 will be most advantageous for you.
Don’t spend another month overwhelmed by your debt, constant phone calls, or threatening letters. Contact us today for your free consultation.