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Bankruptcy filing for debtors with tax debts

Kentucky individuals who are struggling with debt and considering filing for bankruptcy may not know that past due tax obligations are not always eligible for discharge. A Chapter 13 bankruptcy establishes an arrangement for the debtor to repay all obligations over a period of three to five years in accordance with an approved plan, but Chapter 7 allows the discharge of certain types of debt, including federal tax debt if it meets strict requirements.

Individuals filing for Chapter 7 bankruptcy who have filed their tax returns for the past two years and have not committed tax evasion or fraud may be eligible for having tax debt discharged. The debt must be attributable to an income tax return that was due at least three years prior to the bankruptcy filing, and an assessment must have been made by the IRS at least 240 days before the date of the bankruptcy filing. A penalty on a dischargeable tax debt is also eligible for discharge under a Chapter 7 bankruptcy.

Federal tax liens that are attached to property and which preceded the date of the bankruptcy filing will remain even if the underlying debt is discharged, however. Tax obligations that are not allowed to be discharged include payroll taxes and penalties that are related to fraud.

A person who is overwhelmed with debts stemming from credit cards, taxes, medical expenses or other sources can speak with an attorney to obtain information on the bankruptcy process. The attorney can outline the eligibility and other requirements associated with Chapter 7 and Chapter 13 while determining whether there are other available forms of debt relief that may be better suited to the client's particular situation.

Source: FindLaw, "Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy ", accessed on Feb. 27, 2015

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