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Bankruptcy and Taxes: The 3 Most Important Things to Know

By Phoenix Bankruptcy Attorney on June 15, 2023

Tax situations may become complicated in bankruptcy, as not all tax debts can be discharged. It’s in your best interest to consult with an experienced Arizona bankruptcy lawyer about how filing for Chapter 7 or Chapter 13 can affect your taxes.

What Are the General Rules for Discharging Taxes in Bankruptcy?

Filing bankruptcy in Arizona stops all tax collection actions immediately. Tax agencies are subject to an automatic stay, just like all other creditors. When you file, they must stop all tax collection actions, including paycheck garnishments, tax liens on your property, and collection threats. The IRS, state, and other tax agencies can take action to determine the amount of tax owed, but they cannot act to collect it.

Income tax debt is dischargeable in bankruptcy if the following applies:

  • The tax return was due more than three years before the bankruptcy was filed (including any filing extension)
  • The tax return was submitted over two years before you filed for bankruptcy.

If you owe income tax and are considering filing for bankruptcy, your best course of action is to seek guidance from an experienced Arizona bankruptcy attorney. Your attorney will tell you whether an income tax can be discharged in your specific situation.

What Is the Priority of Tax Claims in Arizona Bankruptcy Proceedings?

A tax debt may be considered an unsecured priority debt if there is no collateral attached to it and the IRS has not placed a lien on the debtor’s property. To be a priority debt, a tax debt must meet the following criteria:

  • The due date is at least three years prior to the bankruptcy filing date.
  • Tax returns were filed at least two years prior to the bankruptcy filing.
  • The tax debt is assessed at least 240 days before the bankruptcy filing date.
  • It is not a trust fund tax debt.
  • The tax owed is not on fraudulent returns or from years in which the debtor committed willful tax evasion.

Priority unsecured debts have priority over other debts for public policy reasons. In addition to income taxes, this debt category may include child support and spousal support.

What Are the Specific Considerations for Tax Returns and Bankruptcy Filing?

When you are filing for bankruptcy in Arizona, it is important to have your tax returns filed and up to date. Arizona bankruptcy courts may require the submission of tax returns, and tax debts can impact the bankruptcy process. An experienced Arizona bankruptcy lawyer can help ensure your compliance with local rules and regulations.

How Do Taxes and Bankruptcy Work Together in Arizona?

Certain income taxes may be completely discharged in bankruptcy, while others can never be discharged. If a taxpayer files a fraudulent return or willfully attempts to evade taxes, that tax debt is not dischargeable. Additionally, taxes that become due after bankruptcy is filed cannot be discharged, as bankruptcy can only affect debts you legally owe as of the filing date. If you are considering filing Chapter 13, you may want to consider delaying filing until after the current year’s taxes are due. This will allow you to include the tax debt in your repayment plan and protect you from its collection.

Our experienced Arizona bankruptcy attorneys at Hilltop Law Firm will advise you on the best time to file Chapter 7 or Chapter 13. We offer superior legal services at affordable rates. If you are concerned about tax debt and considering filing for bankruptcy, contact us today at (602) 466-9631 to schedule a free consultation.

Posted in: Bankruptcy

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