Does Bankruptcy Erase Back Taxes In Indiana?
For many people, freelancing part time is a natural extension of working from home. Therefore, about a third of American workers either moonlight or freelance full time. Freelancers experience significant income peaks and valleys. So, they often fall behind on estimated tax payments. The resulting back taxes, penalties, and interest can be overwhelming.
In most cases, a Chicago bankruptcy attorney can either discharge these unsecured obligations or give taxpayers the tools they need to repay their tax debt over time. Discharge and/or repayment is one of the biggest benefits of bankruptcy. This federal debt relief program also stops creditor adverse actions, such as wage garnishment and lien placement, which are often associated with past-due taxes.
Discharge in a Chapter 7
Most people qualify for Chapter 7 bankruptcy. Generally, your household income must be below the average for that family size in that geographic area. If your income is slightly above the line, you still might qualify based on your actual expenses.
Chapter 7 discharges (eliminates) most unsecured debts, such as medical bills and credit cards, in about six months. Economically, income taxes are unsecured debts. The debtor simply promises to pay them. Legally, at least in the bankruptcy context, past-due taxes are priority unsecured debt. Therefore, they are only dischargeable in some situations. The tax discharge rules are:
- No Willful Evasion: Fraudulent debts are never dischargeable in bankruptcy. Normally, the trustee (person who oversees the bankruptcy for the judge) proves fraud by showing that the debtor borrowed money without intending to repay it. In this context, an IRS lawyer normally proves fraud by showing that the debt involved such a large error, like omitting a source of income, that it couldn’t have been an innocent mistake.
- Tax Debt Age: The past-due taxes must be at least three years old, and the returns must have been on file for at least two years. Bear in mind that Tax Day is not always April 15 and that the substitute returns which the IRS often files do not count as taxpayer returns.
- Assessment: If the IRS, or other taxing authority, has assessed the debt in the last 240 days, it is not dischargeable. As a rule of thumb, if the IRS sends a letter which includes the amount due, an accountant probably assessed the debt.
Bankruptcy eliminates debt, but not the collateral consequences of debt. Thus, if the IRS placed a lien on the taxpayer’s property before s/he filed bankruptcy, a lawyer must deal with the lien separately, even if bankruptcy eliminates the debt.
Repayment in a Chapter 13
If you do not qualify for debt elimination in a Chapter 7, you almost certainly qualify for protected debt repayment in a Chapter 13.
The Automatic Stay does more than stop wage garnishment and other actions. It also prohibits creditors, including the IRS, from communicating with debtors, including taxpayers. Furthermore, the Automatic Stay lasts up to five years.
During this period, debtors make income-based payments which retire priority unsecured debt, secured debt arrears, administrative fees, and a few other items.
The IRS occasionally offers similar payment plans. But many people don’t qualify under the complicated IRS rules. Furthermore, and perhaps more importantly, the IRS continues to assess penalties and interest during these repayment periods.
Reach Out to Tenacious Cook County Lawyers
Directly or indirectly, bankruptcy takes care of past-due income taxes. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters in Illinois and Indiana.
Resource:
ddiy.co/freelance-statistics/
