As we roll into tax season, it is important to understand how a Chapter 7 Bankruptcy filing can help you alleviate your debt to the IRS or State of Michigan. It is equally important to know how filing Chapter 7 may NOT help in alleviating your tax debt.

As you may know, the two most common personal bankruptcy filings occur under either Chapter 7 or Chapter 13. In a Chapter 7 filing, you are agreeing to allow the court and the appointed Trustee to liquidate your non-exempt assets to settle your debts. Certain assets can be kept away from this process, such as your car or your primary residence. These are called exemptions. Different states offer different exemptions, and the federal government has its own exemption law as well.

It is important to understand this, as well as understand what tax debt can be alleviated in a Chapter 7 filing. All of the following must be true in order for your tax debt to be discharged.

First, the debt must be from income taxes only. You can’t discharge your business tax debt.

If you have been delinquent in paying sales tax, this also wouldn’t qualify, as this is considered consumption tax, not income tax.

It may seem difficult to envision a situation where sales tax might get one into debt, however, it is fairly common. Let’s say you live in Michigan, yet you have decided to purchase a large yacht from an individual in the state of New York. New York has a 4% state sales tax. If you purchase a $750,000 boat, you are on the hook for $30,000 in sales tax. Not an insignificant amount.

Secondly, there must be no fraud or tax evasion associated with your tax debt. If you have been found guilty of a crime that involves evading the government on your personal income taxes, you will not be able to discharge this debt through the Chapter 7 process.

Your debt must also be at least three years old from the date of your bankruptcy filing. Let’s say you had a really bad 2019. Unfortunately, this debt would not qualify. Also, be aware of tax liens against your property. If your debt is so old that it has been adjudicated in this fashion by the IRS, the lien can not be removed in a Chapter 7 Bankruptcy case.

Also, be sure to keep up on your tax returns. Another qualification for your tax debt to be discharged is that you have to have filed a tax return for the debt at least two years before your bankruptcy filing. Often, those in debt from taxes have not filed their returns. This is a mistake that you should avoid at all costs.

And finally, all tax assessments associated with your debt must be at least 240 days old.

Also, be aware that ANY Chapter 7 Bankruptcy is subject to certain income guidelines that are based on the size of your household and the state you reside in.

If you have significant tax debt and are concerned that the IRS might come calling, be sure to schedule a no-obligation consultation with The Mitten Law Firm. We are dedicated Southgate, MI bankruptcy attorneys.