Will Bankruptcy Clear My Tax Debt

Will Bankruptcy Clear My Tax Debt?

Filing for bankruptcy might be the remedy to serious debt problems, as it can stop most lawsuits, wage garnishments, and many other collection actions. It can also wipe out medical bills, personal loans, credit card balances, and many other debts. However, bankruptcy doesn’t remove all obligations. For example, it does not eliminate many tax debts. 

What Can Bankruptcy Do?

Bankruptcy gives people who are struggling with mounting debt a chance to clear certain obligations and start afresh through liquidation or reorganization. Once bankruptcy is filed and debts are discharged by the court, creditors will stop any action against the debtor. Unfortunately, not all debts can be discharged.

Here is a small list of what bankruptcy can do:

1. Stop Collection Activities and Creditor Harassment

An automatic stay order is issued by the court when you file for bankruptcy. This prevents most lawsuits and wage garnishments and also stops most creditor calls. 

2. Wipe Out Credit Card Debt and Most Unsecured Debt 

Overdue utility payments, medical bills, personal loans, and unsecured credit card debts can be wiped out in bankruptcy. 

How quick this can happen depends on what chapter you file under. Filing for Chapter 7 bankruptcy takes about three to four months to complete, while Chapter 13 gives you the chance to reorganize payment over a three to five-year period.

3. Temporarily Stop Foreclosure and Eviction 

An automatic stay will prevent repossession or foreclosure, but filling under Chapter 7 won’t make you keep the property. You will lose the car or house once the stay is lifted and you still can’t bring the account current. Filling for Chapter 13 can help you meet up with past payments and keep the property. 

An eviction will be halted if you file for bankruptcy while the eviction is still in the litigation process. However, this will likely be a temporary stay. 

4. Eliminate Secured Debt

Filing for bankruptcy can wipe out a secured debt if you can no longer afford to pay for the property. But you will have to give up the asset since you secured it with collateral. 

What Bankruptcy Won’t Do

Bankruptcy is not a magic bullet to all debt problems. It can’t clear some obligations, including:

Most Tax Debts

It is very difficult to eliminate tax debt in bankruptcy. Even if you qualify for Chapter 7 bankruptcy, it won’t wipe out unpaid tax debts in all cases. Unpaid withholding tax for your employees, income taxes, owed penalties, and social security taxes are among back taxes that cannot be discharged in bankruptcy. 

However, it is possible to discharge some of these back taxes if you meet certain conditions and the taxes are due for three years or more. If you are overwhelmed by significant back taxes that you obviously cannot pay, consider seeking professional advice from a tax attorney about OIC (Offer in Compromise) or other options. 

Property Liens

You cannot discharge a home mortgage or a lien on a property in bankruptcy. Of course, bankruptcy can eliminate your obligation on a secured debt, but the lien stays on the property until the debts are settled. A secured creditor can sell the property at auctions and use the proceeds to pay part or all of the loan balance. 

Alimony Obligations and Child Support

Alimony obligations and child support won’t go away even when you file for bankruptcy, regardless of the chapter you file under. 

Student Loans

Getting rid of student loan debt right after graduation is usually not possible. The only way to eliminate student loan debt in bankruptcy is to prove that repaying the loan will bring about undue hardship. However, it is not the easiest thing to convince the court about this in most cases.

Contact USA Tax Settlement for professional and timely help.

Zee Maq is a content writer who specializes in writing business and finance content. She has nine years of experience and loves to provide problem-solving content to help people tackle challenges in their everyday lives.

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