People facing significant financial stress often turn to personal bankruptcy. Certain types of debts, such as credit card balances and medical bills, are eligible for discharge in bankruptcy cases. Other debts, such as mortgages or student loans, are not quite so easy to address.
One of the most stressful sources of debt may be income taxes. Mistakes when filing tax returns can lead to large past-due balances. The Internal Revenue Service (IRS) may also impose penalties and interest on the balance due.
Can people struggling to take control of their income tax debt file for personal bankruptcy to reduce what they owe?
Some tax debts could be eligible for discharge
There are three main ways in which a bankruptcy filing could help a person with significant income tax debts. The first is through the temporary protection from collection activity provided by an automatic stay. People can delay litigation and then respond more effectively to the IRS after reviewing their circumstances.
The second source of relief applies to those with Chapter 13 cases. They may be able to include their income tax debts in the repayment plan and better integrate their tax obligations into their monthly budgets.
The third form of relief comes from the discharge at the end of the bankruptcy process. Federal income tax debts that are at least three years old are potentially eligible for discharge in a personal bankruptcy case. Newer income tax debts may not be eligible for discharge.
People struggling with high levels of income tax debt may benefit from discussing different forms of bankruptcy with an attorney. Filing for bankruptcy before the IRS employs aggressive collection tactics could help people take control of a stressful financial situation.