Bankruptcy may be able to protect you from creditors but not the IRS. Most people really do not understand the process of bankruptcy in relation to taxes. In most cases, filing a Chapter 7 Bankruptcy can eliminate the need to pay taxes but not in all cases. On the other hand, Chapters 11, 12 and 13 Bankruptcy can only create a Repayment Plan on the IRS but still you need to pay taxes.

The bankruptcy process starts with filing a petition with a bankruptcy court. You can file a bankruptcy through Chapter 7 bankruptcy which is called the Straight Bankruptcy which settles all debts including some or in certain cases all income taxes due. Filing a Chapter 7, 12 or 13 Bankruptcy or the Repayment Plan will enable you to create a repayment plan for your tax debts. A Chapter 12 or 13 Bankruptcy can at certain times reduce your tax debts.

Filing bankruptcy will initially protect you from the IRS. The moment you file for bankruptcy, all your creditors including the IRS are prevented from collected any payment. Even though your creditors and the IRS will apply with the bankruptcy court, it is very unlikely that the court will give in to the IRS unless it can prove that the bankrupt taxpayer is into some of fraud.

The obstacle in filing a bankruptcy is the fact that it gives the IRS more time to collect tax debts. If after going through bankruptcy and you still owe the IRS unpaid taxes, it has been gained additional time to collect the balance. The IRS has 10 years within which to collect unpaid taxes, interests and penalties. If after bankruptcy and all your taxes under Chapter 7 have not been dissolved, the IRS still has the remainder of the 10 years plus the number of months it took your bankruptcy case to be resolved plus another six months.

Another disadvantage of filing bankruptcy is the bankruptcy record will remain as part of your credit record for the next 10 years. The advantage of filing bankruptcy though is the fact that you have exerted an effort to pay off your tax debts and your creditors.

A Chapter 7 Bankruptcy can dissolve income taxes due if your situation qualifies under all the following tax codes:

1. The 3-year Rule where the income tax debt was due three years before you filed for bankruptcy.

2. The 2-year Rule where the tax return was filed two years before you filed for bankruptcy.

3. The 240 Day Rule where the IRS assessed your taxes at least 240 days prior to filing.

4. There was no attempt to prevent paying taxes through fraudulent and willful means.

5. Only Income Taxes.

If you are filing a Chapter 12 bankruptcy, you stop paying creditors and the IRS while your petition is still pending in court. After which you pay through the bankruptcy court.

If you are filing a Chapter 13 bankruptcy, you will have a debt repayment plan which you will pay through a trustee appointed by the court. You have between three to five years to pay all your debt as per the repayment scheme. To qualify for a Chapter 13 bankruptcy you need to show proof of any income. Any income pertains to wages, Social Security, income as an independent contractor or pension payments. To qualify, your unsecured debts including taxes should not have been recorded as a lien and should not be more than $250,000. If a lien has been recorded, the debt should not exceed $750,000. In this type of bankruptcy, the repayment plan is submitted to court giving the creditors and the IRS a chance to object the plan. The IRS will never object.

Seomul Evans is SEO services consultant and content writer for leading Dallas IRS Tax Help. Visit the site to know more about Dallas IRS Attorney.

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Author Bio: Seomul Evans is SEO services consultant and content writer for leading Dallas IRS Tax Help. Visit the site to know more about Dallas IRS Attorney.

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