Tax Debt Relief in Bankruptcy

January 19, 2012

By: David M. Serafin

For Colorado residents struggling with tax debt and seeking financial freedom, you may be in luck. Chapter 7 and chapter 13 bankruptcy may allow for the elimination of older income tax debt if the tax debt is three or more years old and if you file the tax return for that year at least 2 years prior to filing bankruptcy. As a Denver and Aurora, Colorado based bankruptcy and tax lawyer, I see my fair share of clients needing bankruptcy help and who are looking to stop IRS collection and harassment.

If you pass the chapter 7 Means Test, you can wipe away almost all of your debt from credit cards, medical bills, most judgments and remaining debt owed from a prior foreclosure or repossession for an underwater home or car. To automatically qualify for chapter 7, your overall household income (including a spouse’s income regardless of whether the spouse is filing bankruptcy) must be lower than the median family in Colorado. If your income is higher, you can still pass the Means Test if your permitted expenses are high enough. Those who qualify for chapter 7 can get rid of their tax debt if such income (not employment, payroll or FICA) tax, is over three years old, the tax return was filed over two years ago, and if no Notice of Federal Tax Lien was filed as to any real estate or valuable personal property owned. Those with mostly business related debt who are excluded from the Means Test can also eliminate liability for income tax meeting these criteria.

Chapter 13 bankruptcy (also known as reorganization protection) – particularly as it relates to tax liability – is more complex. A debtor with very high income will be required to pay back all tax debt, regardless of whether the tax liability meets the elements of discharge and is classified as unsecured. But, those in bankruptcy with a more modest income will only pay back a portion of the taxes at most depending on the Means Test results. A higher amount of non-dischargeable tax debt to be paid over a three to five year repayment plan approved by both the court and chapter 13 trustee increases monthly expenses under the Means Test thus lowering the amount paid to unsecured creditors. Unsecured tax liability is deemed akin to credit card and medical bill debt and will be paid back to the extent of the debtor’s monthly disposable income available to unsecured creditors. Priority taxes do not meet the elements of discharge and is required to be paid back in full in a chapter 13 plan regardless of the debtor’s income and disposable income. Third, the IRS often files and records a Notice of Federal Tax Lien on the debtor’s home thereby requiring that a secured tax debt be paid back in chapter 13 also in spite of income, expenses and household size.

If you face overwhelming tax debt and live in Colorado, please contact attorney David M. Serafin. As a debt relief agency with an office in Cherry Creek, we help persons and businesses alike with a wide range of debt assistance, provide strategic bankruptcy help, and will advise you as to the best way to deal with tax debt.