The new bankruptcy law and discharging of taxes

For some people, outstanding taxes (federal, state or local), are the main reason for needing bankruptcy protection. In the past, an individual using Chapter 13 bankruptcy (this is a repayment plan that generally ran for three years) could obtain a partial discharge for taxes related to unfiled returns and certain late-filed returns; whatever was paid to the government during this period was all the debtor was required to pay.

The new law changes the rules for Chapter 13 bankruptcy. The repayment period is now five years, and the law provides that back taxes related to unfiled or late-filed returns cannot be discharged. This includes interest accrued on the taxes after a bankruptcy petition is filed. And, as under prior law, the treatment of penalties follows the treatment of the underlying taxes to which they relate, so penalties may not be discharged either.

The new law gives the opportunity to obtain a discharge of taxes under Chapter 7 to continue. This is a straight bankruptcy filing where the individual can obtain a fresh start. This discharge applies only to taxes owed on timely filed returns that came up three years prior to a bankruptcy petition being filed; the IRS must have assessed the tax at least 240 days before the petition and there is no fraud.

But now, the opportunity to use Chapter 7 has been severely restricted. This kind of filing is restricted to individuals who have income below a set limit who are unable to afford to make monthly payments to creditors of at least $100. Therefore, only low-income taxpayers can now qualify for Chapter 7 bankruptcy and obtain a discharge of back taxes.

The bottom line about bankruptcy in regards to asset protection: In most cases, you won’t be successful.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.

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