Considering Filing For Bankruptcy? Timing Is Important!

Considering Filing For Bankruptcy? Timing Is Important!

Considering Filing For Bankruptcy? Timing Is Important!

With tax season right around the corner there are just a few things someone wanting to file for bankruptcy should consider.

The First thing that you want to consider is do you have tax debt, and if you do what year is that debt from? When filing for bankruptcy you can only discharge, or “wipe out”, your tax debt if the following conditions have been met:

Your taxes are income taxes.

What type of taxes do you owe? If they are payroll taxes or possibly fraud penalties these can never be discharged in a bankruptcy; however, if you are attempting to wipe out income taxes these might qualify for being wiped out if you meet all the other requirements.

Did you file a fraudulent tax return?

Filing a fraudulent tax return in an attempt not to pay your taxes will disqualify you from later trying to wipe out that debt even if you meet all the other requirements. Filing a fraudulent tax return can be anything from incorrectly claiming Earned Income Tax Credit when you’re not eligible for it; Claiming the wrong deductions or stretching the truth and claiming more on those deductions than you have, or even simply failing to report income. These are just a few examples of a fraudulent tax return.

Is your debt at least three years old?

This is the tricky one because it is all about dates. Say you come into my office today, February 1, 2019, and you have federal tax debt from 2015. You filed your taxes on time and did not ask for an extension. As of today, you have not met the 3-year rule; however, you are very close. If you waited to file after April 15, 2019, you would be eligible to wipe out that tax debt, but if you tried filing before you would still be liable for it. State taxes are a different date entirely though. If you have state tax debt, then you would have to wait until after May 1st to file.

Did you file your tax returns on time?

The IRS must have received your tax return for the debt you are trying to wipe out in the bankruptcy on time. If you are approved for an extension and file it before the deadline you are still on time. However, if your extension expires and you have not filed a return then you cannot discharge this debt.

The second thing to consider is whether the IRS has placed a tax lien on your property. A bankruptcy CANNOT wipe out a previously recorded federal tax lien. All the bankruptcy will do is wipe out your personal obligation to pay this debt, meaning that the IRS will not be able to attach to a bank account or garnish your wages. The lien will still stay in effect, however; meaning that you will have to pay off the lien in order to sell the property.

The final thing to consider is how much you are getting back in tax refunds. A lot of people will use their tax refund in order to pay for their bankruptcy and this is great! But something you want to consider is how much will be in your bank account on the day of your filing. Virginia has a “wild card” exemption (meaning the property that you can keep, and the Trustee can’t touch) known as a “Homestead Deed”. This is a $ 5,000-lifetime exemption that is used for things that don’t already have an exemption, the number one thing being bank accounts. This means you want to be careful about how much money you have in your checking/savings account when you file, if it is more than $5,000 then you might not be able to save all of it.

Considering filing for bankruptcy? Timing is important! Come have a FREE Consultation with Hampton Roads Legal Services and we can give you your best options and whether you qualify to have your tax debt wiped out. Call 757-276-6555 today!

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