Bankruptcy and Back Taxes: Are You Still on the Hook?

When you file for bankruptcy, tax debt may be a top concern, especially if other expenses — such as medical bills — have taken priority. If you are worried about tax debt, you will be relieved to learn that once you file for bankruptcy, both the IRS and the state of New Jersey stop tax collection efforts. But that doesn’t mean that you are exempt from paying what you owe in taxes.

Chapter 13 bankruptcy allows those who qualify to restructure debt and repay creditors over the course of three to five years. Tax debt is included in Chapter 13, giving you the time to pay it off along with your other debt. At the end of this period, your bankruptcy will be discharged and your debt along with it.

Under Chapter 7 bankruptcy, the question of whether your tax debt will be discharged gets a little more complicated. It may be discharged with some exceptions or it may not qualify at all.

To be discharged through Chapter 7 bankruptcy, your tax debt must meet the following criteria:

• The debt is more than three years old.
• The debt is income tax.
• The most recent return was filed more than two years ago.
• The IRS assessed the tax more than 240 days prior to your bankruptcy filing.
• You did not attempt to evade personal income tax and filed returns for the year(s) you accumulated debt.

Consulting an experienced New Jersey bankruptcy lawyer as soon as possible is important, because you may be able to prevent the IRS from placing a tax lien on your property. Property liens are not dischargeable in bankruptcy, so whatever amount is covered by the lien will remain after your bankruptcy is discharged. Conversely, your lawyer may recommend waiting to file to allow for certain time requirements to pass so that you can maximize the amount of tax debt that will be discharged through bankruptcy.

Your lawyer can also help you meet New Jersey requirements, such as contacting the Department of Taxation to notify the state of your intent to file and to submit a list of creditors. The state will then file a proof of claim with the U.S. Bankruptcy Court, which will show your state tax liability. If tax debt makes up the bulk of your debt, your lawyer may even advise against bankruptcy altogether and recommend reaching a settlement with the IRS.

For more than 25 years, the Law Offices of James C. Zimmermann has successfully advised New Jersey clients in bankruptcy matters, including tackling tax debt. For help, call us at 973-764-1633 or contact us online. We have offices conveniently located in Vernon, Wayne, Pompton Lakes, Hackensack and Nutley, New Jersey.