Tax Season and Personal Bankruptcy

For many New York residents, this time of the year is known as tax time. People should have received tax documents from employers and are getting prepared to file their taxes. Many New Yorkers look forward to this time because they are owed a tax refund by the state or federal governments. This money can then be used by consumers for whatever they want.

However, for others this time of year is a time of stress and anxiety when they determine that they actually owe taxes. Tax liability can be an added burden when people are already struggling to make ends meet and pay all their bills. These individuals may be looking for debt relief, not only from their taxes but also from other liabilities.

For some personal bankruptcy can be the answer to their financial problems. Through Chapter 13 or Chapter 7 bankruptcy, people are able to discharge debts and start anew. However, not all debts are dischargeable. Some debts will stay with a person despite a bankruptcy – including certain tax obligations.

Generally, tax debt is only dischargeable if the tax payer has not engaged in fraud, if the return was not fraudulent, the tax filing is more than three years old and filed at least two years ago. The tax debt must also be at least 240 days old. Therefore, more recent tax debt may not be forgiven during a bankruptcy. Furthermore, other types of tax debt – like payroll taxes – may never be discharged.

Tax rules and personal bankruptcy can be complicated. People need to make sure they understand how a bankruptcy will affect their taxes before filing and therefore make the best decision for their situation.

Source: The Herald, “Bankruptcy and tax liability,” Barry Dolowich, March 4, 2014