Stop Tax Debt Fast in Bankruptcy in Raleigh, NC!
Did you know you can erase some tax debt with Chapter 7 bankruptcy? Many people think taxes can’t be eliminated, but if you meet certain rules, your income tax debt might just disappear. Let’s break it down so you can see how bankruptcy can help you get out from under tax debt and get a fresh start.
How It Works
To erase your tax debt through Chapter 7 bankruptcy, the tax debt must meet a few important conditions:
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The tax return must have been due at least three years ago: This means the original due date of the return should be at least three years before you file for bankruptcy. If you got an extension, the deadline is adjusted accordingly—this could mean August or October. If the due date falls on a weekend, the next business day counts as the due date.
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The tax return must have been filed at least two years ago: You have to have filed your tax return at least two years before filing for bankruptcy. If the IRS filed a substitute return on your behalf, that won’t count toward discharging your debt.
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The tax must have been assessed at least 240 days ago: The IRS must have formally assessed your tax debt more than 240 days before you file. If you filed an Offer in Compromise or went through a previous bankruptcy, this period might be extended.
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Only unsecured income taxes are eligible: Chapter 7 can discharge income taxes, but it won’t work for payroll taxes, fraud penalties, or other special kinds of taxes, like the Trust Fund Recovery Penalty. Also, if the IRS secured a lien against any property (like your house), bankruptcy won’t remove that lien.
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The tax return must not be fraudulent: If you filed a fraudulent tax return or willfully tried to evade paying taxes, Chapter 7 bankruptcy will not help discharge that debt.
What Happens When You File Chapter 7 Bankruptcy?
When you file for Chapter 7, the court asks you to turn over any non-exempt assets to pay your creditors. But the good news is, in North Carolina, you get to keep certain things to help you rebuild your life. For example:
- Car equity: You can keep up to $3,500 in car equity.
- Personal property: You can keep up to $5,000 in personal property like household goods, furniture, or electronics.
- Home equity: You can keep up to $35,000 in home equity, or double that ($70,000) if you’re married and filing jointly. If both parties of a married couple are on the deed on their home, they can keep their home if they have no other joint debt.
- Wild Card: You can keep up to $5,000 in equity or cash in anything.
Usually, most people don’t have to give up anything because their property is protected by these exemptions. Property is valued at what it would sell for at an auction, not its replacement value.
Immediate Relief from IRS Collections
Once you file for Chapter 7, the court puts an automatic stay in place. This stay stops all collection efforts from creditors—including the IRS. That means the IRS can’t garnish your wages, seize your property, or put liens on your assets while the bankruptcy is pending. The only way the IRS can bypass this is by asking the court for permission, but that’s rare unless there’s evidence of fraud.
However, the statute of limitations for IRS collections pauses during bankruptcy. This means that once your bankruptcy case is completed, the IRS gets additional time to collect any remaining debt, plus an extra six months.
What Happens if Not All Taxes Are Discharged?
If not all of your tax debt qualifies for discharge in Chapter 7, you might need to file for Chapter 13 bankruptcy afterward. This is often called a “Chapter 20” (Chapter 7 followed by Chapter 13). In Chapter 13, you set up a repayment plan that can last between 3 to 5 years. This gives you more time to deal with any leftover tax debt in manageable payments.
What If I Can’t Pay My Taxes?
If you can’t pay your taxes, bankruptcy might be the solution you didn’t know you had. While not all taxes can be wiped out, Chapter 7 can give you significant relief. And if you’re still left with some tax debt, Chapter 13 can help you pay it back without overwhelming your budget.
Filing for bankruptcy doesn’t just wipe out your debt—it can also help you protect your property, stop the IRS in its tracks, and give you the breathing room you need to get back on your feet.
If you’re struggling with tax debt and need help, contact us to see if bankruptcy can offer the fresh start you need!
