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Some things to know about taxes and bankruptcy

One of the key aspects to a Chapter 7 bankruptcy filing is the discharging of certain debts the filer owes. These debts are placed into two groups: secured and unsecured. The former group consists of debt that can't be discharged through bankruptcy, which are things like child support payments, student debt, most financial aspects related to a crime and certain taxes; while the latter group consists of debt that is dischargeable in bankruptcy (and it usually consists of credit card debt and medical debt).

Notice that in the case of secured debt, "certain" taxes are protected from the debt discharging process. However, personal income taxes can be eliminated through bankruptcy. There are a number of rules and regulations that go along with clearing personal income tax debt, so consult an attorney to get the details on how it will affect you -- but it is an option. Here are a few other things to know about taxes and how they are dealt with during bankruptcy:

  • Bankruptcy does not stop an audit. However, it will stop any collection efforts as a part of the audit.
  • Like we said, income taxes can be discharged. But... the income taxes must be at least three years old, and they must have been filed by the individual (not a substitute filing completed by the IRS or a financial professional). Also, if you failed to file a tax return, you cannot contest the income taxes on that undeclared return.
  • Taxes and bankruptcy have a complicated relationship. So get as much legal and financial advice as you can to be prepared for the situation.

Source: FOX Business, "How Bankruptcy Impacts Your Taxes," Bonnie Lee, July 25, 2013

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