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Three Things You Should Understand About Back Taxes And A Bankruptcy

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If you owe back taxes and are in a financial situation that is overwhelming, you may be thinking about filing for bankruptcy. However, there are many misconceptions about back taxes and bankruptcy. The following are a few things you should know.

Most of your taxes cannot be discharged through bankruptcy

Many people are under the impression that bankruptcy will give them a clean, financial slate, as all of their debts are discharged. This type of bankruptcy is known as Chapter 7, but it mostly applies to unsecured debt such as credit cards. Most taxes are not covered by this type of bankruptcy. If you file on your own, you may learn quickly that you are still stuck with a large amount of back taxes. If you do owe back taxes, it is best to consult with a bankruptcy attorney, so you will understand exactly what your financial situation will be like after bankruptcy, especially Chapter 7.

It is possible to reorganize your back taxes

Although you will still need to pay your back taxes, it is possible to schedule a payment plan as part of a Chapter 13 bankruptcy. This type of bankruptcy is about rescheduling your debts. This schedule can be over several years, so you have an easier time paying the taxes you owe, as well as other debts. In addition, there are both priority and non-priority taxes that are important to understand. Priority taxes are those that can be a part of the scheduled payments, but non-priority taxes can often be dismissed. Which of your back taxes owed qualifies as a priority versus non-priority can have complex definitions. You need the services of an attorney to look at your back taxes to determine which taxes are priority or non-priority.

It is sometimes possible to have your taxes dismissed

The Internal Revenue Service allows for some or all of your taxes to be dismissed. Although this is only done in extreme circumstances, it is possible. For example, if your income is much lower than it was at the time you owed your taxes, it is likely that you will never be able to pay them. This can happen for many reasons. Disabilities from injuries and health problems are only two reasons for this. This type of tax dismissal is separate from bankruptcy, but you may need to do this in conjunction with a bankruptcy filing.

Although bankruptcy may not be the solution you thought it was, it can bring relief from your taxes. You may be able to schedule your payments to give your finances some breathing room. Some taxes may be discharged completely. And for those who are truly in need of relief, taxes can be dismissed. However, to get the most benefit from these laws, you need to consult with a bankruptcy attorney.