Facing IRS tax problems can be one of the most overwhelming financial challenges. Between tax levies, outstanding debts, and mounting interest, many individuals in Southern California find themselves in dire straits. However, if you’re struggling with tax debt, bankruptcy can provide a lifeline. Chapter 7 and Chapter 13 bankruptcy are both viable options for addressing IRS tax debts. In this blog post, we will discuss how bankruptcy can help eliminate or restructure your IRS tax problems and provide relief.

Understanding IRS Tax Problems and Bankruptcy

When you are faced with IRS tax debt, the pressure can feel never-ending. The IRS can levy your assets, garnish your wages, and charge steep penalties. However, filing for bankruptcy can stop these actions and offer a structured plan to resolve your tax issues. While bankruptcy won’t eliminate all types of taxes, it can significantly reduce your tax debt and give you the breathing room to recover financially.

Chapter 7 Bankruptcy and IRS Tax Debt

1. How Chapter 7 Can Eliminate Tax Debt

Chapter 7 bankruptcy, also known as liquidation bankruptcy, can help eliminate most unsecured debts, including many IRS tax debts. However, the IRS tax debts that can be discharged must meet specific criteria:

• The tax debt must be income tax, not payroll or other special taxes.
• The tax debt must be at least three years old.
• You must have filed your tax returns for the years in question.
• The tax debt must not have been the result of fraud or evasion.

If your IRS tax debts meet these criteria, Chapter 7 can allow you to discharge these debts, effectively wiping them off your financial slate.

2. What Happens to Your Property in Chapter 7

If you file for Chapter 7, the bankruptcy trustee may liquidate some of your assets to repay creditors. However, California has exemptions that allow you to keep certain types of property, such as your home or car, depending on its equity. Working with a bankruptcy lawyer is crucial to ensure that you protect as many of your assets as possible during the process.

Chapter 13 Bankruptcy and IRS Tax Debt

1. How Chapter 13 Can Help with IRS Tax Debt

Chapter 13 bankruptcy, or reorganization bankruptcy, is another option for dealing with IRS tax debt. In Chapter 13, you don’t discharge your debts immediately but instead propose a repayment plan that lasts three to five years. This allows you to restructure your debts, including IRS tax obligations, and repay them in manageable installments.

While Chapter 13 does not eliminate IRS tax debts like Chapter 7, it does provide significant advantages, such as:

• Stopping Collection Efforts: Once you file for Chapter 13, the automatic stay prevents the IRS from continuing wage garnishments, levies, or lawsuits.
• Discharge of Certain Debts: After completing your repayment plan, any remaining unsecured debt, including certain IRS tax obligations, may be discharged.

2. Advantages of Chapter 13 for IRS Tax Debts

• Repayment Plan Flexibility: If you owe a significant amount of tax debt, Chapter 13 may allow you to pay off the IRS debt over time, reducing the immediate financial burden.
• Protection from Wage Garnishments: The automatic stay that comes with Chapter 13 filing halts any ongoing wage garnishment from the IRS, allowing you to keep more of your income.

The Role of a Bankruptcy Attorney

Whether you’re filing Chapter 7 or Chapter 13, working with a bankruptcy attorney is essential to navigating the complexities of bankruptcy law. A bankruptcy attorney can help:

• Assess whether your tax debts qualify for discharge.
• Determine which chapter of bankruptcy is best suited to your needs.
• Guide you through the paperwork and court procedures.
• Help protect your assets and ensure the best possible outcome.

A skilled bankruptcy lawyer from Winterbotham Parham Teeple, a PC can help you take full advantage of the protections offered by bankruptcy, including stopping IRS actions and providing a clear path to resolving tax issues.

What Happens After Filing for Bankruptcy?

Once you file for bankruptcy, the automatic stay kicks in, which means creditors— including the IRS—can no longer take collection actions against you. This includes halting wage garnishments, stopping IRS levies, and preventing further legal actions. You will then begin the bankruptcy process, which includes either liquidating non-exempt assets in Chapter 7 or following a repayment plan in Chapter 13.

Once your bankruptcy case is complete, if your IRS debts were discharged, you will no longer be responsible for paying them. In Chapter 13, once you finish the repayment plan, any remaining dischargeable tax debt will be wiped out.

Take Control of Your Tax Issues with Bankruptcy

Filing for bankruptcy can be a powerful tool for individuals struggling with IRS tax problems. By either eliminating or reorganizing your tax debts, bankruptcy can offer a fresh financial start and the opportunity to resolve issues with the IRS. If you’re struggling with tax debts in Southern California, it’s important to speak with an experienced bankruptcy attorney who can help you understand your options and guide you through the process.

Facing IRS tax problems in Southern California? Contact our experienced bankruptcy attorneys today at 800.400.9000 for a consultation and find out how bankruptcy can help you achieve financial freedom.