What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy allows individuals and companies to eliminate their debts by selling assets. Once proceeds from the sale of assets are distributed among the various creditors, the remaining qualifying debts may be discharged. This means the person or business no longer has debts that need to be repaid.
What Is Chapter 13 Bankruptcy?
Individuals with steady income who plan to repay at least some debt can file for Chapter 13 bankruptcy. The primary benefit of being able to submit a payment plan to a bankruptcy court involves your credit rating.
When you complete a Chapter 7 bankruptcy, the damage to your credit rating is significant.
Alternately, since Chapter 13 allows you to repay debtors over time, your credit rating will take less of a hit.
Partnerships or corporations that want to repay debts by creating a repayment plan must file Chapter 11 bankruptcy.
Do You Have to Continue to File Tax Returns After Filing for Chapter 7 or Chapter 13 Bankruptcy?
First, you need to have already filed all returns for the four years before your bankruptcy date. For example, if you filed for bankruptcy on December 1, 2023, you will have sent your tax returns to the IRS for 2022, 2021, 2020, and 2019.
Then, throughout the bankruptcy process, you must continue to file your IRS tax returns or request an extension to file.
Do You Have to Continue Paying Current IRS Taxes When You’re In Chapter 7 or Chapter 13 Bankruptcy?
You will need to pay current taxes you owe the IRS when in bankruptcy. Failing to pay a current tax liability or not even filing a return may result in the IRS denying your application to discharge a past tax debt.
When you list the IRS as one of your creditors on bankruptcy documents, the court sends an electronic notice to the IRS within 24 to 48 hours of your petition date. You do not need to contact the IRS personally if you file Chapter 7 or Chapter 13 bankruptcy.
What Happens to Tax Debts After You Filed for Chapter 7 or Chapter 13 Bankruptcy?
Tax debts are dischargeable in Chapter 7 if the individual or entity:
- Did not file fraudulent tax returns
- Filed tax returns in question at least two years prior to the petition date
- Has tax assessments over 240 days old
- Has due dates for filing tax returns included in the bankruptcy that are at least three years old
- Has not been found guilty of tax evasion
Some tax debt may be discharged with Chapter 13. However, most individuals who file Chapter 13 bankruptcy will pay off tax debt according to an agreed upon IRS payment plan.
Priority tax debts cannot be discharged under Chapter 13 bankruptcy rules.
Common priority tax debts include:
- Penalties associated with nondischargeable taxes
- Taxes that should have been collected or withheld (i.e., payroll taxes)
- Property taxes accrued within one year of the bankruptcy petition date
- Certain customs duties and excise taxes
Nonpriority tax debts that may be discharged under Chapter 13 include older tax debts and tax debts involving returns that were filed two or more years before you filed Chapter 13 bankruptcy.
Can You Still Receive a Refund While in Bankruptcy?
You can get a tax refund while in bankruptcy, but it could be delayed or used to offset your tax debt. If you have a refund coming, the bankruptcy trustee in charge of allotting assets to your creditors could also request the refund.
If you are in bankruptcy and want to know the status of your refund, the IRS has a “Where’s My Refund?” tool.
You can also call the IRS Centralized Insolvency Operations Unit (CIOU) to find out whether you will receive your refund. When you contact the CIOU, you must give them the number of your bankruptcy case to verify your refund amount.
If You’re Currently in Chapter 7 or Chapter 13 Bankruptcy, Do You Qualify for IRS Tax Relief to Help Pay Off Tax Debts?
Since Chapter 7 bankruptcy typically discharges tax debts, the IRS offers tax relief for Chapter 13 filers. A “hardship discharge” may be issued by the IRS to an individual with a payment plan created for a Chapter 13 case if they cannot meet the repayment requirements due to sudden loss of income.
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