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Tax Issues: Which Chapter to Choose 

Pytte Law April 11, 2023

According to statistics from the 2021 Internal Revenue Service Data Book, more than 8.4 million Americans owed over $133 billion in past-due taxes, penalties, and interest to the IRS in 2021. When overwhelmed with debts or facing financial hardship, bankruptcy is among the promising solutions to achieve financial relief. However, various issues often arise when a person with huge tax debts or back taxes is seeking a financial fresh start through bankruptcy. Thankfully, there are certain situations where bankruptcy can help discharge your tax debts

At Pytte Law, I enjoy giving experienced legal guidance and reliable advocacy to clients in bankruptcy and tax debt-related matters. As a knowledgeable Georgia bankruptcy attorney, I can look over your financial situation and inform you about your available legal options to discharge your past-due taxes. My firm proudly serves clients across Savannah, Hinesville, Statesboro, Ludowici, Bryan County, and Tattnall County. 

Tax Issues During a Bankruptcy Case 

When filing for bankruptcy, you’re also required to file all of your tax returns for the tax periods ending within 4 years of your bankruptcy filing. In addition, the taxpayer must keep filing their taxes or request an extension to allow them to file their necessary tax returns later. 

Furthermore, all current taxes must be paid as they become due. If you’re delinquent on your tax filings and current taxes, the bankruptcy court might dismiss your case. However, depending on your unique situation and the bankruptcy chapter you are filing, you may be able to discharge some of your tax debts. 

Managing Tax Debts with Chapter 7 Bankruptcy

Chapter 7 bankruptcy is designed to eliminate most of your general unsecured debts and give you a deserved financial "clean slate." You may be able to wipe out your taxes through Chapter 7 bankruptcy if you meet the following conditions: 

  • The past-due taxes are income taxes. 

  • You didn’t file a fraudulent tax return. 

  • You didn’t intentionally attempt to avoid paying your taxes. 

  • You filed your tax return at least two years prior to filing for bankruptcy. 

  • The tax debts are at least three years old. 

  • You pass the "240-day rule." 

Managing Tax Debts with Chapter 13 Bankruptcy

Another option to manage your tax debts is by filing for Chapter 13 bankruptcy. It involves proposing a structured repayment plan – over 3 to 5 years – to pay your tax debt with your potential income. If you file for Chapter 13 bankruptcy, you should expect the following: 

  • Tax debts that are older than three years might be forgiven. 

  • There will be no additional interest or penalties on your dischargeable tax debts. 

  • The IRS must abide by your Chapter 13 repayment plan, provided that you are consistent with your payments. 

If you’re considering filing for bankruptcy to eliminate your tax debts, you need to reach out to an experienced bankruptcy or tax debt attorney immediately. Your lawyer can advise you about your available legal options and the type of taxes that can be eliminated – or not eliminated – through bankruptcy. 

Taxes that Can Be Eliminated from Bankruptcy

The following taxes may be eliminated through bankruptcy: 

  • Federal income tax debt. 

  • State income tax debt. 

  • Tax debts from mistakes or errors. 

  • Tax debts that are at least three years old. 

  • Tax debts that might create undue hardship if you pay. 

Taxes that Cannot Be Eliminated from Bankruptcy

However, filing for bankruptcy won’t wipe out the following tax debts: 

  • Tax liens 

  • Fraud penalty taxes. 

  • Payroll taxes 

In Chapter 7 bankruptcy, you may qualify for a tax debt discharge at the end of your case. Conversely, in a Chapter 13 case, you may need to repay your past-due taxes over the 3 to 5-year period of your repayment plan. However, a tax lien – legal judgment against your property – must be paid either to the state or federal government.  

Rely on Dependable Legal Advice

Seeking a bankruptcy discharge can relieve you of your obligations to pay off your tax debts. However, before filing for bankruptcy, it is important that you understand your possible options and the benefits and drawback of each bankruptcy chapter. At Pytte Law, I have the expertise and diligence to advise and direct clients in complex bankruptcy matters involving tax debt discharge. 

As your lawyer, I can work to understand your specific situation and help determine the ideal bankruptcy chapter than can help wipe out all or most of your tax debts. In addition, I will work diligently to address your needs and concerns and help resolve your tax issues effectively. 

Contact me at John E. Pytte | Your Georgia Debt Relief Specialist today to arrange an initial consultation with a bankruptcy attorney. I have the personalized legal counsel and reliable advocacy you need to make intelligent decisions. My firm proudly serves clients across Savannah, Hinesville, Statesboro, Ludowici, Bryan County, and Tattnall County.