Make sure you always file your taxes.
Video Transcribed: Edward Kelly here at one 188 Debtline. We are into our series on special debts. These are debts that unlike your run of the mill, unsecured debts, like medical bills, credit cards, personal loans are treated differently by the bankruptcy court. So we talked about student loans last time, which you’re pretty much out of luck on, although they can be useful in certain ways.
Today we’re going to talk about taxes. Most people think you’re totally out of luck on taxes, but actually that’s not entirely true. The rule is that if taxes have been properly filed and are at least three years old, that’s going to be three years from when you filed them, they can be fully discharged. So I have lots of clients who come in and if they’re that old, regardless of what’s been going on, you’ve been paying a little here and there, if you’ve made it to the three year mark, those can be discharged.
Now bear in mind, a lot of people don’t understand this. It’s three years from when you file them. So another reason you absolutely should file your taxes, even if you can’t pay them by filing them, you are starting the clock. If three years go by and you have not paid them, then they can be discharged. So if you can keep the wolves at bay that long or take minimal damage, then you can actually discharge those debts.
In a chapter seven, something you do have to watch out for in a 13. What Basically happens in a 13, you’re often going to bifurcate the debt. So let’s say you have some tax debt that’s three years old and some that’s less than three years old. Well the debt that’s less than three years old must be dealt with 100% fully in the plan, in the time at the plan generally.
The rest be unsecured and could be discharged at the end. But, sometimes a chapter 13 will get knocked out a feasibility and there is no way you can do it because your tax debt has to be paid in full during the bankruptcy. I’ve seen that happen many times. However, once again, anything that was filed properly and is more than three years old can be discharged. This can be a powerful tool if you’ve got a bu…
And when people come in with a 13 and have a whole bunch of tax debt, that’s my goal immediately is, “Hey, let’s deal with this”. They may think, “Oh, how can we take care of all this?” But if you’ve got enough to pay for that tax debt in full, at least the portion that’s less than three years old, then you’re going to have a great 13 you’re going to walk away with the debt you couldn’t have got rid of anyway, basically frozen.
I’m not subject to all those horrible penalties and fees that you normally are going to get with the IRS. Not totally frozen, but it’s not going to be nearly as inflated as it would outside of a chapter 13 and the stuff that’s more than three years old discharged along with every bit of your insecure debt.
So that’s the treatment of taxes. Pretty straightforward, filed on time, three years old or more, dis-chargeable, less than that, not dis-chargeable under any circumstances.
So that’s it for this edition of 188 Debtline. We’ll be back with another edition in this series on special debts. As always, you can reach me at 188deadline or email me at firstname.lastname@example.org. That’s Edward at Wirth, w-i-r-t-h law office.com.