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How Chapter 13 bankruptcy can help those with income tax debt

On Behalf of | Apr 1, 2024 | Chapter 13 Bankruptcy

People may end up in serious debt due to a variety of financial circumstances. Some people accrue debt due to medical issues, while others may overuse credit cards and then have a hard time regaining control over their finances. Still others may get in over their heads with tax-related financial obligations.

People have to pay income tax every year based on their personal resources and income. A variety of factors, including the size of their family and the source of their income, can drastically alter tax obligations. It can therefore be surprisingly easy for otherwise responsible and ethical people to end up facing insurmountable tax debt. Those aware that they have fallen behind on their income taxes and who are unsure of how they can cover their tax debt may consider bankruptcy. Chapter 13 proceedings may be a viable solution for those with decent income and valuable property.

How can a Chapter 13 bankruptcy benefit someone with overwhelming income tax debt?

By helping balance a budget

For many filers, the most beneficial component of bankruptcy might be the discharge at the end of the process. Those who fall behind on their income taxes may find that their credit card payments or other debt-related obligations make catching up on their taxes all but impossible. The elimination of those outside or secondary debts can free up quite a bit of someone’s budget so that they can enter into a payment arrangement with the IRS. An offer in compromise may be easier to negotiate when someone has eliminated debts that prevent them from allocating their financial resources to pay their tax debts.

By forgiving old income tax debts

As a general rule, most tax obligations are not eligible for discharge in a bankruptcy. However, there is an exception for older income tax debts. Specifically, people can eliminate income tax debts that are more than three years old as part of a bankruptcy discharge. While someone’s more recent tax debts are still due and payable, getting rid of the oldest tax debts could turn an insurmountable challenge into a debt that someone can address with careful budgeting. Tax debt can cause massive stress and financial disruption for those who have not paid the IRS exactly what they should.

A Chapter 13 bankruptcy can be a valuable solution for those with income tax debts. Learning more about the different types of bankruptcy and their impact on certain types of debt can help people choose the best solution for their circumstances when they’re facing serious financial hardship.


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