Income taxes consume a significant portion of an individual’s earnings each year. In cases where people have multiple streams of income, pay their own taxes as self-employed professionals or have other complicating tax return factors, taxpayers may unintentionally fall significantly behind on their income tax obligations.
They might have assumed that their employer had withheld adequate money for taxes and may not have filed a tax return, for example. People facing high levels of income tax debt are likely very anxious about the consequences of their unpaid taxes. Some may even start considering a personal bankruptcy filing. There are several ways in which bankruptcy could assist those trying to overcome income tax debt, including the three introduced below.
Eliminating other financial pressures
People who owe income tax debts may have other financial obligations as well, ranging from credit card debt to medical debt. Those financial obligations can make it very difficult to set aside adequate capital to pay the income tax debt. Those who successfully complete a personal bankruptcy filing can eliminate other financial obligations and can then commit more of their budget to handling their tax debt.
Facilitating a payment plan
People pursuing Chapter 13 bankruptcy have to negotiate a repayment plan with their creditors. In some cases, this process may include discussions about tax debts due to the Internal Revenue Service (IRS). Filers may be able to work out an arrangement in which they make monthly payments as part of a Chapter 13 repayment plan to diminish their outstanding income tax debts.
Eliminating older tax debts
Most tax debts are not eligible for discharge in bankruptcy. However, older income tax debts may qualify for discharge. Any income tax debts that are more than three years old at the time of a bankruptcy filing may be eligible for inclusion among the dischargeable debts. The ability to eliminate some of the oldest income tax debts can make it easier for people to catch up on what they have accrued in more recent years. Bankruptcy can also help people facing aggressive collection tactics by granting an automatic stay that can prevent litigation and other pending collection efforts.
Discussing personal debts and financial concerns with a skilled legal team can help those considering a bankruptcy filing choose the best option available. Personal bankruptcy can prove beneficial for those concerned about unpaid income taxes and the possibility of more aggressive collection efforts in the future.