If you have past-due tax debt that you owe to the Internal Revenue Service (IRS), New York State Department of Taxation & Finance (NYS Tax), and/or New York City Department of Taxation (NYC Tax) you know that the government authorities can be very aggressive in enforcing back due taxes.
1. Problems & Risk of Owing Past-Due Tax Debts.
If you have past-due taxes the balances continue to grow over time because of interest and penalties. The government can intercept any tax refunds that you are entitled to receive from them and apply the money against your past-due taxes. They can garnish your wages. They can put a lien on your assets. They can seize your bank accounts, car, house and other properties.
2. Bankruptcy Solutions to Tax Problems.
For many people with past-due taxes bankruptcy may be a way to either (a) get their finances affairs in order so they have money to deal with the taxes, or (b) a way to wipe out the taxes.
a) Chapter 7 Bankruptcy Solutions.
In the Frequently Asked Questions (FAQs) on our website Will all my debts get discharged (wiped out) in bankruptcy?) we have provided a general overview of the rules regarding discharging debt in a personal bankruptcy filing. For some people filing a chapter 7 bankruptcy will be a way that they can permanently eliminate their past-due taxes without having to pay them. To figure our whether or not your taxes can be wiped out in bankruptcy you will need to know exactly what taxes you owe and for what years. You can contact the IRS, NYS Tax and NYC Tax and follow their procedures to order copies of your “tax transcript” for each tax year you have an unpaid balance. We have successfully used chapter 7 bankruptcy to help many of our clients permanently eliminate their taxes.
For this strategy to work you have to have filed your tax returns. If you owe taxes for a tax year for which you never filed a return then chapter 7 bankruptcy cannot be used to wipe out the tax.
Even if you will not be able to discharge (i.e., wipe out) your taxes in chapter 7 because the taxes are either too new or a type of tax debt that the Bankruptcy Code says doesn’t get wiped out in bankruptcy (such as personal responsibility for unpaid sales tax, payroll taxes, etc.), chapter 7 bankruptcy can still help you. Most people who have tax problems also have other debt problems, such as high credit card debt. Chapter 7 bankruptcy can be used to wipe out the other non-tax debts you have (such as credit cards) so that when you come out of bankruptcy you will have more money to work out a successful repayment plan with the government for your past-due taxes. We have used this strategy successfully for many of our clients.
b) Chapter 13 Bankruptcy Solutions.
We have covered how chapter 13 works in prior Blog posts ( Chapter 7 or Chapter 13 Bankruptcy Filing in New York?) and ( New York Chapter 13 Bankruptcy Eligibility Requirements and Issues), as well as on the Frequently Asked Questions (FAQs) on our website (What are the benefits of chapter 13 (why file chapter 13 instead of chapter 7)?). Chapter 13 can be particularly useful for people with large past-due taxes that can’t get discharged (i.e., wiped out) in chapter 7 bankruptcy because in chapter 13 bankruptcy you are protected from all collections, garnishment and lien enforcement activity while you are in bankruptcy. Past-due tax debts have priority under the bankruptcy law ahead of other types of debts, such as credit cards, doctors’ bills, etc. In chapter 13 you make payment each month based on the leftover money in your budget after payment of your living expenses, such as rent, food, utilities, etc. The repayment is made under a bankruptcy court approved chapter 13 plan that provides for payment over a period of three to five years.
Many people find that the repayment plans offered by the IRS or NYS Tax outside of bankruptcy are too high – after paying the government you don’t have enough money to cover your necessary living expenses and other debts. In chapter 13 you – and not the government – get to decide on the amount of the monthly repayment under your chapter 13 plan. Outside of bankruptcy you can’t stretch out the IRS of NYS Tax for three to five years, but in chapter 13 bankruptcy you can. Any pending wage garnishment will stop and the government will look to payment to your chapter 13 plan. Many of our clients with past due tax debts have found this ability to stretch out repayment of past-due tax debt to the government in chapter 13 has made a huge and positive change in their lives.
Please feel free to contact us at 888-867-8615 for further information or to schedule a consultation.