Federal taxes can be stifling for many people. Penalties and interest add up fast, eventually leading to wage garnishment or liens. In some cases, unforeseen events can cause a person to owe far more than he or she expected.
Filing for bankruptcy under Chapter 13 can be very helpful when taxes are hard to pay. People can get their bearings and figure out a game plan moving forward. However, it is important to look at some of the conditions of a Chapter 13 bankruptcy.
Prepetition
To qualify as a debtor, a person has to have gone to a certified credit counseling agency for help within the preceding 180 days. The IRS will expect the person to file all returns for the last four tax years. If the court accepts the bankruptcy filing, the IRS can discharge many of the tax debts, but only if the debtor has filed all the returns on time.
Post-petition
After petitioning, debtors still have to make payments and file returns for their income taxes. A person cannot discharge any post-petition tax liabilities, and when tax creditors file claims, these liabilities get priority. In the event that the debtor overpays on taxes after petitioning, the IRS can rebate the amount or hand it over to the bankruptcy trustee.
Many people do not know where to start when handling federal tax debts, nor do they know what to expect when they file for bankruptcy. With the right foresight, debtors can settle their issues smoothly and move on.
