Chapter 7

Chapter 7

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The purpose of the federal bankruptcy laws is to give people who are saddled with debt an opportunity to start over and, once again, become productive members of society.

The law recognizes that some people are unable to pay everything they owe to creditors and that it serves no purpose to allow these individuals to continue to be hounded by collection agencies.

Most debts are dischargeable in bankruptcy, and this includes certain IRS and tax debts.

IRS Taxes are Dischargeable

Many people, including quite a few accountants and lawyers, wrongly believe that taxes are not dischargeable in bankruptcy.

This is an insidious myth that has prevented some delinquent tax debtors from getting a “fresh start” through the bankruptcy process.

Generally, there are two types of bankruptcy available to an individual taxpayer:

1. Complete liquidation under Chapter 7; and

2. Wage earner payment plans under Chapter 13.

The Chapter 7 Process

In Chapter 7 all of the taxpayer’s assets and liabilities are managed by a Court appointed Trustee.

The assets, except exempt assets, are liquidated and the proceeds paid to creditors in the order specified in the United States’ Bankruptcy Code.

To the extent non-exempt assets are insufficient to pay all creditors, the remaining unpaid debts are forgiven (discharged).

Generally, all income taxes, both Federal and State taxes may be discharged if they are old enough.

Income taxes are dischargeable in Chapter 7 if all of the following criteria are met.

1. The tax relates to a tax year for which a return became due more than 3 years before the date the Voluntary Petition was filed;

2. A tax return was filed more than 2 years prior to the filing of the Bankruptcy petition;

3. The tax was assessed more than 240 days prior to filing of the Bankruptcy petition;

3. The tax was not due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat the tax;

5. The tax was not assessable at the time of the filing of the Bankruptcy petition; and/or

6. The tax was unsecured

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida