Understanding how tax debt impacts bankruptcy in New York is by far one of the more complex aspects of Chapter 7 bankruptcy. Unless you have experience filing for bankruptcy in the past, you probably don’t know whether or not IRS debt is dischargeable or if there are any other relief options.
At Grady BK, PLLC, we approach each and every one of our clients as though they were our only client. We will be with you every step of the way as you navigate tax debt during bankruptcy in New York, equipping you with the knowledge you need to proceed with peace of mind. In this article, we will discuss if IRS debt can be discharged during a bankruptcy and the options you have if you’re filing for bankruptcy with outstanding tax debt.
Can Tax Debt Be Discharged in Chapter 7?
When comparing different types of bankruptcy, Chapter 7 is one of the most common. It’s suitable for those with a normal to low income, allowing them to complete the entire bankruptcy process in a matter of months. And the good news is that Chapter 7 can help you take care of some types of tax debt.
Firstly, you must understand that you can only have your tax debt discharged if it is income taxes, no other type of tax debt qualifies. Also, you can’t have a history of trying to evade paying your taxes or committing tax fraud.
Additionally, not all types of income taxes qualify for discharging as there are some very specific rules in place. One of these rules is that the tax debt has to be at least three years old. For tax late filings, you must have filed these two years before you filed for bankruptcy.
Another rule to keep in mind is if your taxes have been assessed by the IRS that must have been done 240 days before you filed for bankruptcy. Altogether, these regulations make up the 3-2-240 rule used to manage tax debt in bankruptcy.
What Happens to Tax Liens in Bankruptcy
In addition to general tax debt, you may also need to know what happens to tax liens if you file for bankruptcy. Unfortunately, Chapter 7 bankruptcy does not discharge tax liens/tax warrants. And how the remaining tax lien is handled will depend on whether or not it is a New York or an IRS tax lien.
A New York bankruptcy attorney can help you understand how this impacts your case and what your options are moving forward.
What to Do if Your Tax Debt Doesn’t Qualify for Discharge
So, your tax debt doesn’t qualify for a bankruptcy discharge, what next? Even though this can be quite disappointing, especially if one of the reasons you filed for bankruptcy was for tax debt, you still have options.
Here are the best solutions you can use to manage and pay off any outstanding tax debt after bankruptcy.
Start a Payment Plan
The best option available to New York residents with tax debt is to get on an installment agreement with the IRS. The majority of people qualify for a payment plan, allowing you to make manageable monthly payments until your balance is paid off in full.
Making monthly payments is by far the best option for most people, no matter how much tax debt you owe. As long as you keep on top of your monthly payments and follow the requirements for your payment plan, the IRS will usually be satisfied, as you are making progress.
Offer a Compromise
A less common option that you may qualify for is to offer a compromise with the IRS to settle on a lower amount than your total balance. This may be a valid option if there is very little chance of you paying off your complete balance through normal methods or if there is a legitimate reason for doubting that the balance is the correct amount. The IRS may also consider this if there are exceptional circumstances at play that would make it unfair or inequitable to collect the full amount.
Just keep in mind that you usually won’t be eligible for this option if you have an open bankruptcy case.
Consider Chapter 13 Bankruptcy
Depending on your income, you may qualify for Chapter 13 instead of Chapter 7 bankruptcy. Chapter 13 is a repayment plan type of bankruptcy that restructures your debt in a manageable way and discharges (wipes away) what is remaining after a three or five year repayment plan.
So, Chapter 13 bankruptcy can help you restructure tax debt into more realistic monthly payments that take your other living expenses into account. Usually, this is done by spreading out what you owe over the course of 60 months interest-free.
FAQ:
Can I eliminate IRS debt with Chapter 7 in New York?
Although it is possible to eliminate some of your tax debt by filing Chapter 7 bankruptcy, only income tax debt is dischargeable and it must meet certain eligibility criteria. When it comes to tax debt, timing is everything.
Does bankruptcy remove tax liens?
No, New York State and IRS tax liens aren’t dischargeable and will continue to be your responsibility after filing for bankruptcy.
New York’s Top Compassionate Bankruptcy Attorney
Although the Chapter 7 tax debt rules in NY can feel overwhelming, there is a relatively clear path forward. At Grady BK, PLLC, our bankruptcy attorney is here to help you every step of the way, whether you have already gotten started or have run into issues with your case. We strive to provide clarity so that you understand what your options are and how to get the best possible outcome.
At Grady BK, PLLC, we provide personalized attention to each of our clients, taking into account your unique needs as you go through the bankruptcy process. So, if you have any questions or concerns, don’t hesitate to reach out.
Contact us today at 315-299-9005 to discuss your situation with a bankruptcy attorney in New York. Our team at Grady BK, PLLC, is here to help in any way that we can.
