By: Linda Schiffer
If you are not a lottery winner, there aren’t too many options open to you in paying a tax debt. Obviously, the money is not there and other pressing debt issues are. In today's society, many rely heavily on cash advance loans.
Trying to eliminate your overall debt is difficult, especially in today’s world. There are many people in the same situation as you are. How to go about getting rid of the burden of debt can be stressful. The question becomes: Where do I go from here?
For many people, when faced with a tax bill and other financial problems, the only solution is to declare bankruptcy.
Understanding What Chapter 7 Is and How it Works
Chapter 7 is often called a ‘straight’ bankruptcy because it liquidates non-exempt assets to benefit creditors. Chapter 7 works best when a person does not own real estate or other viable properties and assets.
When declaring bankruptcy under Chapter 7, there are three basic rules that apply to tax debt discharge for income, along with two additional rules that follow.
The first two rules are found under the Bankruptcy Code, Section 507 and the third is found under Section 523.
- The Three Year Rule: The due date for the tax return debt that has been requested for discharge must be at least three years prior to declaring bankruptcy.
- The 240 Day Rule: It is required that the assessed taxes were done 240 days prior to declaring bankruptcy (including the audit date, if an audit was done). It is absolutely necessary to have a copy of the IRS Transcript in determining the assessment date.
- The Two Year Rule: The requirement is that the return was filed more than two years before the bankruptcy filing and that no fraud was involved.
Tax Liens, if filed in the tax payer’s county prior to bankruptcy, may halt a dischargeable tax debt because it means that assets are not free and clear. Personal liability might be discharged, but not the lien.
Chapter 13 Bankruptcy and How it Works for Tax Debt Discharge
Chapter 13 varies from Chapter 7 because it is a type of payment plan bankruptcy. What this means is that some of the debt due creditors will have to be paid back. Chapter 13 is the second choice of bankruptcy filing and should be used only when Chapter 7 cannot be used.
The same Three Years and 240 Days rules apply in Chapter 13 but the difference is that, if the taxes are not three years old and do not meet the 240 days, they are not dischargeable under Chapter 7 and therefore the tax bill will not be discharged under Chapter 13. The tax bill will have to be paid in full plus, there is a Trustee’s Fee of 10% placed on the payment plan.
Changes in the Bankruptcy Laws
In October of 2005, the Bankruptcy Laws changed in the USA. If a debtor has a median income above that of the average of the resident, then it is necessary to file for Chapter 13 bankruptcy, providing most of their debt is consumer debt (credit cards and the like). The discussion is still going on as to whether tax debt is to be considered consumer debt.
The new law does not affect the basic tests for tax debt dischargeable bankruptcy. The new law does, however, clarify the meaning of ‘tax return.’ Now the law makes clear that a substitute for return that is signed by the taxpayer is sufficient as a tax return, but it does specifically exclude an SFR not signed by the taxpayer.
More tax debt advice coming soon from payday cash advance loans.
