It only causes further confusion if one realizes that bankruptcy can discharge liens, taxes, and other debts. The laws governing taxes and bankruptcy are numerous and intricate, like other legal issues.
What if the five-year Chapter 13 plan doesn’t allow a person to pay off my non-dischargeable tax debt?
The general rule is that the priority taxes owed as of the filing must be paid in full under a Chapter 13 plan. Sometimes, the sum is simply too high to be paid within the five-year window allowed under Chapter 13 bankruptcy.
Think about making the IRS a compromise offer. The IRS is able to compromise tax claims through negotiation with taxpayers (or, as it were, non-payers).
The agreement can be based on either questionable liability (you may not actually owe the amount you claim), or uncertain collection (you lack the funds to pay the tax you are required to pay). According to their estimation of what it should cost you to live on for 50 months or the remaining time of the collection statute, whichever is less, the IRS normally expects you to pay them whatever income is “extra” in their perspective.
One must consider waiting until the taxes in question have aged before declaring bankruptcy if they are not dischargeable due to their recent nature. As time goes by, income taxes become dischargeable.
If our property is foreclosed, would there be tax repercussions?
One may incur tax repercussions as a result of foreclosure. Capital gains tax and income tax on debt cancellation are the two types of tax obligations that may become due after a foreclosure.
Tax on capital gains
For purposes of calculating capital gains, a foreclosure is viewed exactly like an arm’s length sale. If there is a gain depends on the property’s tax base, whether it is your primary residence, etc.
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The estate, not the debtor, should be responsible for the tax repercussions if the property is already owned by the estate at the time of foreclosure. In situations where the loss of the property is unavoidable, this anomaly in the law may offer some planning opportunities. If the foreclosure takes place after, rather than before, bankruptcy, a person may be able to avoid the additional insult of having the loss trigger taxes on money you didn’t receive upon the transfer.
Elimination of tax debt
Prior to filing for bankruptcy, foreclosures may result in income through debt cancellation. IRC 108 Consider your options for legally avoiding that tax. The personal liability for the debt was discharged in the bankruptcy, not as a result of the foreclosure, if the foreclosure occurs after the filing of a bankruptcy case that results in a discharge.
What occurs to tax liens that are still in effect after the Chapter 7 discharge?
The lien exists solely as a charge on the equity in the property that the debtor had at the beginning of the case if the discharge in the Chapter 7 case discharges the debtor’s personal liability for the tax year or years for which there is a lien. The lien continues to exist as it was at the start of the bankruptcy. It does not apply to assets you acquire after filing for bankruptcy.
Generally speaking, the court has no interest in settling tax disputes that would endure the bankruptcy in a Chapter 7 with no assets, where there will be no payment on creditors’ claims.
However, in Chapter 13, there is always a distribution to creditors, thus the necessity for the court to resolve disputed claims is significant. The bankruptcy court may offer the quickest and most affordable means of obtaining a just resolution to a tax dispute.