While the majority of taxes cannot be eliminated through bankruptcy, some can. The bankruptcy experts at Burr Law Office can examine your case to see if your tax debt can be eliminated. Though not simple, filing for Chapter 7 bankruptcy and finding out if your debts qualify for discharge may eliminate some tax debt..

You can wipe out or discharge tax debt by filing Chapter 7 bankruptcy only if all of the following conditions are met:

• The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy. In other words, the debt needs to be a regular tax payment that you owed either the State of Wisconsin or the federal government.
• You did not willfully evade paying your taxes or file a fraudulent return. Bankruptcy will not help in these circumstances. Your actions need to have been lawful.
• Your tax debt is at least three years old. The original tax return must have been due at least three years prior in order to effectively file for bankruptcy. So if you were to file for bankruptcy in April 2020, for instance, this would apply to your 2017 taxes that were due April 15, 2018.
• You filed a tax return at least two years before filing for bankruptcy. To eliminate a tax debt, a return for that debt must have been filed. Generally, if your extensions expired and you filed late, you have not filed a true return and will not be able to eliminate the tax debt.
• The tax debt must have been assessed by the IRS 240 or more days before you file for bankruptcy, or must not have been assessed yet. This is called the “240 day rule.” If the IRS suspended collection efforts due to a compromise or previous filing, this deadline may be extended.

Tax Liens & Bankruptcy

Tax debt and tax liens are different things. Tax debt is simply money that you owe either the State of Michigan or the IRS. A tax lien is a legal judgment secured against your property to satisfy a tax obligation that you owe the state or federal government. Should you qualify for Chapter 7 bankruptcy, and meet all of the above criteria, unfortunately bankruptcy will not eliminate prior tax liens.

Your obligation to pay off the debt will be discharged, but not eliminated. However, the IRS will no longer be able to go after your income or bank account.

However if a tax lien was filed before you filed for bankruptcy, the lien will remain on the property. If you ever want to sell your property, you will have to pay off the lien before you can do so.

Do you have other tax related, or bankruptcy questions?  Let us know. We’re happy to help.

The experienced attorneys of Firebaugh & Andrews  are here to answer your bankruptcy questions. Give us a call at 734-299-7222  today for your free evaluation.

Common Bankruptcy Exemptions Some common types of property that are exempt from bankruptcy proceedings include:

The Debtor’s Home. This is known as the homestead protection. Federal and state exemption laws allow a debtor to protect the his or her home from creditors in bankruptcy up to a certain dollar amount. The amount that is protected varies widely from state to state. ·        

The Debtor’s Car. Bankruptcy law recognizes that many debtors need a car in order to maintain a job and meet their financial obligations. Therefore, a bankruptcy exemption exists for the debtor’s car. The exemption does not allow a debtor to spend his or her money to drive an expensive car while not repaying his or her financial obligations, however. The exemption is limited to a specific dollar amount. ·         

Household Goods. Bankruptcy law sets a maximum exemption amount for all of the debtor’s household goods and a maximum amount per individual item. Often, a bankruptcy trustee recognizes that there is little value in used household goods and these items are not used to satisfy debts even if they are cumulatively worth more than the maximum amount. Household goods can include things such as pots and pans, bedding and decorative items. 

Personal Items. Some personal items such as reasonably necessary clothing are exempt. Jewelry, up to a certain amount, may also be exempt. ·        

Retirement Savings. The vast majority of retirement savings are protected by the bankruptcy code including pensions, stock bonus plans, Individual Retirement Accounts (IRAS), 401ks and other employer sponsored retirement plans. While this can be reassuring to a debtor it is often frustrating to a creditor since retirement savings may be among the most valuable of the debtor’s assets. ·       

Awards in personal injury cases are typically exempt from bankruptcy proceedings. ·        

Tools of the trade are exempt up to certain dollar amounts established by law. For example, a professional photographer may be able to keep expensive cameras and processing equipment that an amateur photographer would need to sell in order to satisfy his or her debts. Despite the above list of exempt property, creditors are typically not discouraged and actively pursue their claims if a debtor who owes them money files for bankruptcy protection. The bankruptcy trustee will use the debtor’s non-exempt assets to satisfy creditor claims in order of their legal priority. Call Firebaugh and Andrews today at 734-722-2999 to assist you in your bankruptcy decision.

In the current real estate market, real property is taking a beating. If your house is worth less than what you owe, then it isn’t really an asset. If you sold it, what would you get? A Chapter 7 Trustee is only interested in assets. An underwater house isn’t an asset. It’s usually your biggest debt. If this the case, you can keep it your underwater house. Lucky you.

If the house has some equity, you will have to use your your homestead exemption to protect that equity. You can protect up to $20,200 in equity using the federal exemption 11 USC 522(d)(1). If you are married and it is jointly held, you can double this exemption. That’s a lot of equity you can protect. Most of my clients in the Detroit, Michigan area and the surrounding cities like those in Westland area don’t even come close to that kind of equity.

If the house has more equity than your exemption allows, there is a really good chance the Chapter 7 Trustee will be looking in to selling or liquidating the house. You would still get to keep your exempt amount. For example, if a house is worth $100,000 and it has a secured mortgage with a balance of $50,000, you would have $50,000 in equity. If you were married, you could protect $40,400 which would leave $9,600 unprotected. The Trustee is going to want that and if that means the house has to be sold to get it, so be it.

If your situation is like that in the example, you may want to consider filing a Chapter 13 or be prepared to “buy” your non-exempt amount from the Trustee. The Trustee really doesn’t care where the money comes from as long as it is paid and can be paid to the unsecured creditors.

Call us for your free evaluation 734-722-2999