What Happens to My IRS Tax Debt if I File Bankruptcy?

In Louisville, ky, it's common for individuals and businesses to struggle with IRS tax debt. In fact, according to recent data, the average tax debt per taxpayer in the city is around $5,000. 

However, if you're one of the many Louisvillians facing overwhelming tax debt, what happens to that debt if you file for bankruptcy? 

Fortunately, bankruptcy can sometimes provide relief from IRS tax debt, but it's important to understand the specific rules and limitations that apply in this situation. 

In this article, we'll break down everything you need to know about how bankruptcy affects IRS tax debt in Louisville, ky.

So, let’s dive into it.

Tax Debt: Bankruptcy and the Automatic Stay

One of the key ways that bankruptcy can provide relief for IRS tax debt in Louisville, ky, is through the automatic stay. 

When you file for bankruptcy, an automatic stay goes into effect that prohibits creditors from taking any collection action against you, including wage garnishment, bank levies, and foreclosure. 

In other words, the automatic stay will block IRS collection proceedings, such as wage garnishment.

However, it's important to note that the automatic stay only applies to taxes that are dischargeable. 

In order to be dischargeable, the tax debt must meet certain criteria, such as being at least three years old and having been assessed at least 240 days before filing for bankruptcy. 

Additionally, you must have filed a tax return for the tax year in question and not have committed tax fraud or evasion.

As long as your tax debt meets these criteria, the automatic stay can provide temporary relief while you work to discharge the debt through bankruptcy. 

Having access to such a service can be beneficial for individuals and businesses in Louisville, ky, who are struggling with overwhelming tax debt and are looking for a way to get back on solid financial footing.

Tax Debt Discharge in Chapter 7 Timeline

In addition to the automatic stay, filing for Chapter 7 bankruptcy in Louisville, ky, can also provide relief for dischargeable IRS tax debt through the discharge process. 

Generally, a discharge process is a legal procedure that releases a debtor from any personal liability he or she may have for some types of debts.

However, it's important to note that the discharge process for tax debt in Chapter 7 can be a bit more complex and time-consuming than for other types of debt. 

In most cases, the bankruptcy process begins with a meeting of creditors, also known as a 341 meeting, which usually occurs within 40 to 50 days of the filing of the bankruptcy petition.

After the meeting of creditors, the debtor must complete a financial management course, and if the tax debt meets the criteria for discharge, the court will issue an order discharging the debt.

From filing to discharge, the entire process can take approximately four to six months, depending on the complexity of the case and the schedule of the court.

However, it's important to note that this timeline can vary depending on the specific circumstances of your case.

What Determines Whether Your Taxes Can Be Erased?

As mentioned earlier, not all tax debt can be discharged through bankruptcy. To determine whether your taxes can be erased, it's important to understand the specific criteria that must be met. 

In Louisville, ky, the following criteria must be met for taxes to be dischargeable:

• The taxes must be at least three years old and have been assessed at least 240 days prior to filing for bankruptcy.
• You must have filed a tax return for the tax year in question.
• You cannot have committed tax fraud or evasion.
• The taxes must not be related to any fraudulent activities.
• The taxes must not be related to any taxes on income received while operating a business or profession as a self-employed individual.

Depending on the circumstances, if your tax debt meets these criteria, it may be dischargeable through bankruptcy. 

However, it's important to note that these criteria can vary depending on the specific circumstances of your case and the bankruptcy code. 

Therefore, it's important to consult with a bankruptcy attorney in Louisville, ky, to determine your eligibility for relief.

Special Rules for Student Loans

While bankruptcy can provide relief for many types of debt, student loans are one area where the rules are a bit different. 

As of 2020, Kentucky residents had an average debt of $32,500 owed on their student loans.

In Louisville, ky, as well as in the rest of the United States, student loans have special protections and are not automatically discharged through bankruptcy.

To discharge student loans through bankruptcy, the debtor must prove that repaying the loans would cause undue hardship. 

This is a high standard to meet, and it requires the debtor to show that they cannot maintain a minimal standard of living if forced to repay the loans and that this state of affairs is likely to continue for a significant portion of the repayment period, and that the debtor has made a good faith effort to repay the loans.

However, it's worth noting that even if a debtor is unable to discharge their student loans through bankruptcy, the automatic stay that goes into effect when they file for bankruptcy can provide temporary relief from collection action.

Therefore, this can give the debtor some breathing room to explore other options, such as loan consolidation or income-driven repayment plans.

What Happens if I Have Tax Debt That Can’t Be Erased Yet?

If you have tax debt that can't be erased through bankruptcy in Louisville, ky, it doesn't mean that you're out of options. 

Even if your tax debt is not dischargeable, filing for bankruptcy can still provide relief in a number of ways.

In the first instance, the automatic stay that applies when you file for bankruptcy may provide temporary relief against collection actions. This means that the IRS will not be able to garnish your wages or levy your bank account while your bankruptcy case is pending.

Bankruptcy can also provide relief by eliminating or reducing other types of debt that you may have. This can free up money that you can use to pay off your tax debt. 

For example, if you have credit card debt or medical bills that can be discharged through bankruptcy, eliminating those debts can free up money that you can use to pay off your taxes.

Moreover, filing for bankruptcy can also give you more time to pay off your taxes through an instalment agreement with the IRS. This payment plan allows you to pay off your taxes over time rather than in one lump sum.

What About My Tax Refund?

Another important consideration when dealing with tax debt in Louisville, ky, is what happens to your tax refund. If you're expecting a refund and you're also struggling with tax debt, it's important to understand how your refund may be affected.

When you file for bankruptcy, the automatic stay that goes into effect can also prevent the IRS from taking your refund to pay off your tax debt. 

In most cases, the refund will be protected and can be used to pay for living expenses or to catch up on other bills.

However, it's important to note that if you have a current year's refund, it may be considered part of your bankruptcy estate and may be subject to being used to pay off your creditors. 

Furthermore, if you have outstanding taxes for previous years and you are expecting a refund for the current year, it may be seized to pay off your outstanding tax debt.

Therefore, it's important to consult with a Tax attorney in Louisville, ky, to understand how your refund may be affected by your tax debt and the bankruptcy case. They can help you explore options to protect your refund and devise a plan to address your tax debt.

Final Thoughts

In Louisville, ky, IRS tax debt is a common problem; bankruptcy can provide relief through the automatic stay, which stops collection actions, and the discharge process, which can eliminate dischargeable taxes. 

However, not all tax debt can be discharged, and special rules apply to student loans. Even if tax debt can't be erased, bankruptcy can still provide relief by stopping collection actions, eliminating other types of debt, and giving more time to pay off taxes through instalment agreements. It's important to consult with a bankruptcy attorney to understand the specific rules and options that apply to your case, including the impact on tax refunds.