IRS Income Tax Bankruptcy: Differences Between Chapter 7 and 13

Every day, thousands of people begin to look into the bankruptcy process. Many of them do so because they are interested in getting rid tax debt, as well as other money that they owe creditors. Before you move forward, you need to become familiar with IRS tax bankruptcy and what it is all about. This is not something that you should take lightly. Filing for bankruptcy is a very big deal - regardless of what you may hear from others.

The two most common types of bankruptcy are known as Chapter 7 and Chapter 13. Chapter 7 is a liquidation bankruptcy and Chapter 13 is a readjustment of debts. Although they are similar in some ways, Chapter 7 can lead to all of your taxes being discharged while Chapter 13 typically results in part of your debts being discharged while the rest have to be paid back via a payment plan. That being said, you want to know as much as possible about both types before you decide how to move forward.

With Chapter 7 bankruptcy you must meet several requirements for tax debt to be discharged. They include: tax returns filed, debt must be related to a tax return that is three years or more old, must be assessed at least 240 days prior to filing, income tax is the only type of tax debt that qualifies, and the debt must not be related to any sort of fraud such as tax evasion. If you do not meet even one of these qualifications you can forget about your IRS tax debt being discharged. Typically, if you can pay $100 dollars a month, of you don't meet many of the qualifications above, and your financial situation is severe, you will look to apply for Chapter 13.

With Chapter 13, you will need to meet certain qualifications, including 4 years of consecutive tax filings before filing, and having secured debts not exceeding $1,000,100 and your unsecured debts not exceeding $337,000. Generally, if you cannot pay at least $100 a month for 5 years then you should not be applying for Chapter 13. With chapter 13, there is usually a distribution to creditors during the bankruptcy process. For this reason, the trustee appointed by the court must negotiate with the IRS to reach a settlement on how much of the debt will be discharged.

If your IRS debt is discharged through Chapter 7 bankruptcy they can no longer collect from you. Of course, this does not protect you against future problems. Keep in mind that a bankruptcy cannot remove any previous tax liens related to the money you owed. To release a lien, you must pay the IRS the value of the lien, pay the lien before selling, or file for Chapter 13 bankruptcy.

Before deciding on the Chapter that is best for you, decide if you want to pursue bankruptcy at all. Realize that bankruptcy destroys your credit which means that you cannot easily obtain a mortgage, credit card, car loans, or anything where your credit needs to be reviewed because your credit will show bankruptcy giving creditors fears that you will not be able to repay them. Instead, it is recommended that you look to settle your taxes with the IRS which could mean that pay the IRS over time (IRS payment plan or Installment Agreement), or you settle for less (Offer In Compromise, Partial Payment Installment Agreement, and others).

This information should help you when it comes to deciding whether or not bankruptcy is the right way of dealing with your IRS tax debt.

IRS Income Tax Bankruptcy
For guidelines, qualifications, and differences between Chapter 7 and Chapter 13 visit BackTaxesHelp.com. Get alternatives as well to bankruptcy which can help prevent your credit degradation.