Bankruptcy vs debt consolidation, which one is right for your current debt problems?

Tax debt is one of the most common reasons for bankruptcy - personal or business. With the generous penalties and interest the IRS applies to owed monies, the sum can escalate at an alarming rate. Unfortunately, trying to resolve tax debt by dealing directly with the IRS can be a terrifying and frustrating experience that can sometimes serve to only make the problems worse.

Congress enacted sweeping reforms to the US Bankruptcy Code in 2005 due to lobbying by credit organizations and claims that the bankruptcy system was being overused and misused. Included in these changes were provisions to make discharging tax debt with a bankruptcy more difficult or impossible. Michigan bankruptcy lawyers have the expertise and experience to advise you on these complicated reforms.

Most tax debt cannot be discharged with either a Chapter 7 or a Chapter 13 bankruptcy. With a chapter 13, or Wager Earner’s plan, initiated with Michigan bankruptcy lawyers, you will still owe the remaining tax debt at the end of your plan, even though some of the balance will be included in your payment schedule. In a Chapter 7, some of this debt may be wiped out, but only if you meet very specific criteria:

– A tax return was filed on the debt - The tax debt you wish to discharge must have had the appropriate returns filed at least two years before filing a bankruptcy petition.
– The taxes owed are income taxes - trustee taxes (payroll taxes), penalties and other types of taxes are not eligible for discharge.
– The tax debt is at least three years old - the debt you wish to discharge must have been owed for at least three years before the bankruptcy was filed.
– No fraud or willful evasion - if you filed a fraudulent income tax return or other wise committed fraud, such as willfully evading paying income taxes, bankruptcy will not discharge any debt associated with this.
– The 240 day rule - the IRS must have assessed this income tax debt at least 240 days before the bankruptcy package is filed or the debt must not have been yet assessed by the IRS. If the IRS stopped the collection of this debt because of an offer in compromise or a previous bankruptcy filing, this deadline may be extended.

Any tax liens recorded against your property will remain on your record even if the taxes themselves are discharged. The automatic stay that occurs with filing bankruptcy will temporarily prevent the IRS from pursuing collection methods on the discharged taxes, but the amount of the lien will remain against your property. In the event you decide to sell that property, you will have to pay off the amount of the lien first. Michigan bankruptcy lawyers can provide further information on bankruptcy and the IRS.

About the Author:

When faced with overwhelming debt and the possibility of bankruptcy, Michigan bankruptcy lawyers can offer advice and help get your financial situation back under control.

Nick Messe | Bankruptcy Basics |

Tags: bankruptcy filing, bankruptcy lawyer, Chapter 13 Bankruptcy

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