Illinois individuals who owe back taxes may consider bankruptcy as a viable option. While you may have heard that tax debt cannot be discharged under bankruptcy, that’s not always accurate. There are various cases where tax debt can be discharged.
The differences between Chapter 7 and Chapter 13 bankruptcy
Tax debt may only be discharged in Chapter 7 and Chapter 13 consumer bankruptcies. If you file for any other type of bankruptcy, your tax debt won’t be discharged. Chapter 7 is considered a straight bankruptcy where your non-exempt assets are sold off and the proceeds used to pay your creditors. In a Chapter 13 bankruptcy, you’ll establish a payment plan with many of your creditors to pay them back within a given period, typically three to five years.
The five factors to discharge tax debt
In order for your tax debt to be eligible for discharge under Chapter 7 bankruptcy, it must meet all five of the following factors. First, its due date must be at least three years ago. Second, the tax return must have been filed at least two years ago. Third, the tax assessment must be at least 240 days old. Fourth, the taxpayer may not be guilty of tax evasion. Fifth, the return may not be fraudulent.
Under Chapter 13 bankruptcy, tax debt will be satisfied first in your repayment plan. It’s vital to note that tax debts are more likely to be discharged under Chapter 7 bankruptcy compared to Chapter 13 bankruptcy.
Contrary to popular belief, tax debt can be discharged under some circumstances when a person files for bankruptcy. If you’re considering filing for bankruptcy, it’s desirable to speak with an attorney first. They can help to determine which type of bankruptcy is in your best interests.