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Understanding the Relationship Between Taxes and Bankruptcy

Published January 28, 2013 by Erin B. Shank, P.C.

Income tax is a bittersweet matter for many Americans. On one hand, this interest-free loan to the government takes a large chunk of most taxpayers’ income each pay period. On the other hand, after going through the tedious process of arithmetic and filing in forms, many Americans can count on getting a large portion, if not all, of the money they paid in income taxes over the past year, and sometimes, even more than they paid in, depending on qualifying credits. However, many people also face tax liabilities, meaning they have to pay more to the government or must watch their refund diminishing rapidly as they fill in those annual tax forms.

For some people, tax liability presents a hardship. Owing the IRS and not having the money to pay, even with an extension to file or pay, can make things difficult. The IRS is not very forgiving when it comes to this matter, and those who find themselves too far behind face penalties. The good news is that bankruptcy may be able to help. If you owe a tax debt, it may be discharged if the taxes were filed two years prior to your bankruptcy. And even if a complete discharge is not possible, a Chapter 13 filing could help you to negotiate a reasonable payment plan. Consulting a tax professional or tax attorney can help you to determine the best route for your particular situation, and a qualified bankruptcy attorney can further advise you on the relationship between your tax debt and bankruptcy plans.

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