Bankruptcy Tax Tips

Many changes to tax law regarding bankruptcy changed in 2005.  The Internal Revenue Codes have not changed as much as the Bankruptcy Code.  The new bankruptcy laws affect how assets are protected and how long back-owed taxes are expelled.

Chapter 13

The new law modifies the laws regarding Chapter 13 bankruptcy. Chapter 13 bankruptcy states that a person can partially expel un-filed taxes not paid after a three-year repayment plan.  The repayment period used to be three years but now it is five years. This means that the repayment period is longer which gives you a longer period of repayment, hence you pay more of your indebted taxes.  The new law does not expel any un-filed taxes owed due to failure to file taxes and the accumulated interest has to be paid.

Chapter 7

Under Chapter 7 total bankruptcy, the new law still allows bankruptcy filers to discharge taxes due on filed tax returns up to three years before filing bankruptcy.  This means that you can discharge filed taxes owed for two years before the bankruptcy.  The filed taxes have to have been filed at least 240 days prior to the exact filing date of Chapter 7.  The difference here is when the taxes were due vs. when they were filed. 

More Chapter 7 Laws

The tax return cannot have been found to be fraudulent.  Due to the total discharge of taxes, there has been more stringent restrictions for who can file Chapter 7.  Now, only people incapable of paying approximately $100 per month are allowed to file Chapter 7 bankruptcy to discharge back taxes.