Bankruptcy Tax FAQ

June 12, 2020

When you owe past due taxes and other debts you cannot pay, declaring bankruptcy with the assistance of a Los Angeles accounting firm provides financial relief. If you are thinking of filing for bankruptcy or already have and are wondering about your taxes, review answers to common questions to help determine what’s right for you. 

How Does Declaring Bankruptcy Relieve Past Taxes? 

Filing for bankruptcy sends an injunction known as an automatic stay to your creditors. The IRS along with all other creditors must cease collection activities, including filing property liens, sending letters, and taking income from your bank account. The stay remains in effect until your case ends, at which time the IRS can restart collection efforts. However, if your tax debt has been paid or discharged by the court, you will not have to worry about the IRS sending more letters and taking other actions. 

Are There Types of Dischargeable & Non-Dischargeable Tax Debt?

Only some types of tax debt is dischargeable by the court assuming you meet certain criteria, such as income taxes due a minimum of three years before you filed. You must prove you did not intentionally try to avoid paying taxes for the years in question, or commit fraud, something Encino tax consultants can help you with. 

In terms of non-dischargeable tax debt, it depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. If you file for Chapter 7, the IRS will likely resume collection efforts once the automatic stay ends. If you file for Chapter 13, you can request a three to five-year repayment plan to pay off non-dischargeable debt. Older, unsecured tax debt gets discharged. 

Will Waiting to File Bankruptcy Protect My Tax Refund? 

The trustee assigned to your bankruptcy case will take the entire refund for creditor repayment purposes if you file prior to receiving your refund in the new tax year. This occurs because you were granted the full refund at the time of your filing. However, you may be able to keep part of your refund depending on how much of the tax year was left at the time of your filing. If you file when there are three quarters left in the tax year, for example, the trustee can only take one-fourth of your refund. 


Discuss your bankruptcy tax case today with Wallace & Associates, your Los Angeles accountant service.