People can fall behind on a variety of different financial obligations. Some people accrue too much in credit card debt and then have a hard time making even minimum monthly payments. Others might end up sick or injured unexpectedly and may then face insurmountable medical debts that put them at risk of litigation.
For some homeowners and working professionals, tax debt can become an issue. Perhaps someone with real property does not have a mortgage on their home. If they failed to set aside money for property taxes, they could have a large debt owed to local authorities. Working professionals might also have income tax debts due to a sudden change in employment or a lack of familiarity with the rules for self-employed professionals.
When tax debts loom large, people often worry about not just aggressive collection efforts but possibly also prosecution. Can personal bankruptcy help resolve tax-related financial obligations?
Only one type of tax debt is dischargeable
Part of what makes bankruptcy so helpful during times of financial hardship is the ability to eliminate certain debts via the discharge granted at the end of the process. There are many kinds of unsecured debts that are eligible for a discharge during bankruptcy.
Sadly, most tax debts are not dischargeable financial obligations. The one exception applies to older income tax debts. Outstanding income tax balances that are at least three years old or older may be eligible for discharge in a personal bankruptcy filing.
More recent income tax debts and debts related to other types of taxes are typically not eligible for discharge. However, bankruptcy can still be useful for those with more recent income tax debts or other outstanding tax obligations.
The automatic stay provided when someone files can help delay legal action related to those debts. If the bankruptcy filing is successful, discharging other debts can help the filer afford to budget for their tax obligations. They may be able to work out a payment arrangement or set aside enough funds to catch up on their obligations.
Discussing personal bankruptcy and current financial challenges with a skilled legal team can help people avoid major financial setbacks related to their taxes. Bankruptcy can offer relief by delaying collection activity and reducing the debts someone has to pay.