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Tax debt is not something you can ignore; it will not go away, and the government has many tools at its disposal to collect what it thinks you owe. They can garnish your wages, freeze your bank accounts, seize funds, and if you are on Social Security or unemployment, they can take money right out of your account before you ever get the check. And all the while a tax debt is looming and continues to get bigger with penalties and interest.

The good news is that tax debts can sometimes be dealt with effectively in bankruptcy. Even when they can’t, bankruptcy can help eliminate other debt, freeing up your disposable income so you can deal with the tax debt head-on and take care of it before it grows any larger. See below for helpful information about dealing with tax debt in and out of bankruptcy, and call The Law Office of Charles A. May for help in Southern California from a skilled and knowledgeable lawyer.

Getting Rid of Tax Debt in Chapter 7

Chapter 7 is the best and most straightforward way of dealing with debt in bankruptcy. In Chapter 7, your unsecured debts are eliminated, wiping the slate clean and giving you a fresh start. In theory, Chapter 7 involves the liquidation of your non-exempt assets to pay your creditors before getting rid of any debt, but with the appropriate application of the California bankruptcy exemptions, most people get their debt discharged without losing any property.

By eliminating your unsecured debts like credit cards and doctor bills in bankruptcy, you may be able to afford to pay any tax debts you owe and avoid further penalties. In addition, some tax debts can themselves get wiped out in bankruptcy. Specifically, federal income taxes can get discharged in Chapter 7 provided the following conditions apply:

  • The debt relates to a tax return you filed at least two years ago
  • The debt relates to a tax return with a filing deadline that is more than three years old, counting any extensions you got
  • The assessment of the tax is at least 240 days old
  • The underlying tax return is not fraudulent, and there is no evidence of tax evasion

Paying Off Tax Debts in a Chapter 13 Repayment Plan

Perhaps you cannot qualify for Chapter 7, or your tax debt is not eligible for discharge in Chapter 7. You might still find effective relief in Chapter 13 bankruptcy. Chapter 13 involves adjusting your debts and putting them all together in a repayment plan that lasts three or five years, depending on your available income, after which your remaining unsecured debts are discharged. By rolling your tax debts into a Chapter 13 plan, you can pay them off affordably over several years without accruing any additional penalties or interest or worrying about collections from the government.

Non-Bankruptcy Options to Deal With Tax Debt

The IRS does have options for people struggling to repay their tax debts. They sometimes accept payment plans that allow you to pay your debt off in installments without the threat of wage garnishment or incurring additional penalties and interest. You might also be able to negotiate an Offer in Compromise with the IRS, where the government agrees to accept a payment less than the total amount you owe. An offer in compromise can be paid off in one lump sum or periodically, depending on what you can negotiate. You will need to show severe financial hardship and convince the government that they are unlikely to collect the full amount of the debt so they are better off negotiating a compromise with you. If there is a question as to whether you really owe the debt or not, this is another reason the IRS is likely to accept an offer in compromise.

Get Help With Tax Debts in Southern California

If you are drowning in tax debt and other debts in Orange County, Los Angeles or elsewhere in Southern California, The Law Office of Charles A. May wants to help. We will evaluate your situation and advise you on your options, helping you find the best solutions to your troubles. Call our bankruptcy lawyer today for a free consultation to get started putting overly burdensome debt behind you.

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