Understanding How Bankruptcy Affects Your Tax Debt
Facing financial challenges can be overwhelming. If you’re considering bankruptcy, understanding how it impacts your taxes is crucial. Bankruptcy isn’t just about managing debts. It also involves dealing with complex bankruptcy tax rules.
When you file for bankruptcy, it’s not just about wiping the slate clean and starting anew. There are tax implications you need to be aware of to avoid surprises down the road. Understanding how bankruptcy affects your taxes is important, no matter if you’re an individual or a business. This can help you plan your finances better.
Quick Summary:
- Bankruptcy involves complex tax rules that can have lasting effects on your financial situation.
- Different types of taxes, such as income taxes and property taxes, may be treated differently in bankruptcy. While some taxes can be discharged in bankruptcy, others may remain non-dischargeable.
- The types of bankruptcy in Oregon encompass Chapter 7, Chapter 11, and Chapter 13. Each offers different options and implications for individuals and businesses facing financial challenges.
- You can get rid of income tax debt in bankruptcy, but only if it follows certain rules. The debt has to be for federal income taxes. It can’t involve fraud or willful evasion and must meet time limits set by bankruptcy laws.
Overview of Bankruptcy Tax Rules in Oregon
When you file for bankruptcy in Oregon, it’s important to know that there are specific tax rules you need to follow. These rules determine how taxes are treated in bankruptcy cases. Some taxes may be discharged, while others may not. These are based on federal laws outlined in the Internal Revenue Code (IRC), but there may also be Oregon-specific considerations. Here’s a simple explanation of these rules:
Types of Taxes
Taxes come in different forms, like income taxes, property taxes, and payroll taxes. Each type of tax may be treated differently in bankruptcy.
Dischargeable Taxes
Some taxes can be wiped out, or “discharged,” in bankruptcy. This means you don’t have to pay them anymore. Usually, income taxes that are old enough and meet certain criteria can be discharged.
Non-Dischargeable Taxes
Not all taxes can be discharged. Taxes like recent income taxes or taxes related to fraud typically cannot be wiped out in bankruptcy.
Tax Liens
In some cases, even if the tax debt is discharged, the IRS or other tax authorities may still have a claim on your property through a tax lien. This means they can seize your property to pay off the tax debt.
Types of Bankruptcy in Oregon
There are different types of bankruptcy to choose from. Let’s explore what each one means and how they might affect your taxes.
Chapter 7 Bankruptcy
This type of bankruptcy is like a fresh start. If you can’t pay your bills and have little to no income, Chapter 7 might be an option. It’s like pressing a reset button on your debts, and most of them can be wiped out. However, some of your property might be liquidated or sold to pay back creditors.
In Chapter 7, many debts, including some tax debts, can be wiped out. However, certain tax debts may still need to be paid, depending on the circumstances.
Chapter 11 Bankruptcy
Chapter 11 is mostly for businesses, but some individuals use it too. If your business is struggling but you think it can be saved, Chapter 11 might help. It’s like a chance to come up with a plan to pay back your debts over time while keeping your business running.
The tax treatment in Chapter 11 can be complex, especially for businesses. The IRS may be involved, and there might be specific rules about how tax debts are handled during the bankruptcy process.
Chapter 13 Bankruptcy
Chapter 13 is for individuals with a regular income who need help with debts but want to keep their property. It’s like making a deal with your creditors to pay back what you owe over three to five years. You get to keep your assets while you repay your debts.
In Chapter 13, you still have to pay your taxes, but you can include them in your repayment plan. This can make it easier to manage tax debts while working towards financial stability.
Types of Taxes That Can Be Discharged in Bankruptcy
While bankruptcy can be a great option to give you relief from many types of debt, taxes are not always treated as dischargeable debt. Typically, tax debt is labeled as “non-dischargeable priority debt.” This means it can’t be wiped out through bankruptcy. This also means tax debt is often prioritized for repayment.
However, there’s a chance some of your tax debt could be discharged in bankruptcy. This includes:
Income Taxes
Income taxes are taxes you pay on the money you earn. In some cases, certain income taxes can be wiped out in bankruptcy.
Property Taxes
Property taxes are taxes you pay on real estate or personal property you own. Depending on your situation, some property taxes might be cleared in bankruptcy.
In addition, there are rules and exceptions to consider:
- Recent Taxes: Taxes owed for the current tax year or previous years may not be cleared in bankruptcy.
- Fraudulent Taxes: Taxes that were assessed because of fraud or tax evasion typically cannot be cleared in bankruptcy.
- Trust Fund Taxes: Taxes withheld from employee wages, such as payroll taxes, are usually not eligible for clearance in bankruptcy.
When Income Taxes Can Be Discharged in Bankruptcy
Discharging income taxes in bankruptcy can provide relief from financial burdens, but it’s essential to understand when this option is available. Before you can get rid of income taxes in bankruptcy, you need to meet certain conditions:
- The taxes must be federal income taxes: Taxes related to payroll or fraud penalties can’t be eliminated.
- The tax debt must be at least three years old: This means the tax return was due three years before you filed for bankruptcy.
- There shouldn’t be any fraud or willful evasion: If you filed a fake tax return or tried to avoid paying taxes on purpose, bankruptcy won’t help.
- You must pass the “240-day rule.”: The IRS must have assessed the income tax debt at least 240 days before your bankruptcy filing, or not at all. Sometimes, this time limit is extended if the IRS stops collecting because of an offer in compromise or previous bankruptcy.
- You need to have filed a tax return: In some states, you must have filed a tax return for the debt you want to get rid of, on time and at least two years before filing for bankruptcy. If you filed a late return and the IRS filed one for you, you might not be able to discharge the tax. However, this rule doesn’t always apply. In some courts, you can discharge tax debt even if you filed a late return, as long as you meet the other criteria.
How Our Portland Bankruptcy Attorney Can Help
Understanding how bankruptcy affects taxes in Oregon is crucial if you’re facing financial difficulties. Bankruptcy can provide relief from certain types of tax debts, but it’s essential to know which taxes can be discharged and which cannot. Consulting with our Portland bankruptcy attorneys at Michael D. O’Brien & Associates, P.C. can help you understand these rules and make informed decisions about your situation.
Our bankruptcy law firm is here to help you understand your options. We can guide you through the process and provide the support you need to achieve financial freedom. We’ll answer your questions, explain how the Oregon tax rules might apply to you, and help you explore if bankruptcy could be the right path forward. Contact us now to schedule a free consultation and take the first step towards a brighter financial future.
