Many different challenges can prevent people from balancing their budgets. Some people develop high credit card balances and then have a difficult time making even their monthly minimum payments on their different accounts. Others might have unexpected medical issues that leave them with large hospital bills to cover.
For quite a few people, tax obligations become a source of financial stress. All it takes is a job loss that prevents someone from paying their property taxes or a mistake on an income tax return to have a huge debt that the government may want to collect. People facing the possibility of aggressive collection efforts sometimes turn to personal bankruptcy to eliminate their debt and rework their finances.
Can a personal bankruptcy filing help those with substantial tax debt?
Most tax debts aren’t eligible for discharge
The main benefits of bankruptcy stem from the automatic stay that prevents collection activity and the final discharge of eligible debts. Unfortunately, tax debts usually aren’t eligible for discharge during bankruptcy proceedings.
People can temporarily halt collection efforts when they file, but they likely have to pay most types of tax debts even after they finish the bankruptcy process. The one exception relates to older income tax debts. Specifically, any federal income tax debts that are three years old or older may be eligible for discharge during bankruptcy. Property tax debts and more recent income tax debts are not eligible for discharge.
Bankruptcy can help without eliminating the debt
For those who owe recent income tax debts or other types of tax debts, bankruptcy may not eliminate their financial obligations to the government. However, they can theoretically discharge a large number of other financial responsibilities, including their credit card balances and medical debts. The elimination of those other financial obligations can make it easier for people to allocate their income toward their unpaid taxes.
Between the automatic stay that people receive when they file and the discharge of eligible debts, the positive financial impact of personal bankruptcy can be quite beneficial for those worried about their tax debts. Learning more about bankruptcy rules can help people determine if personal bankruptcy is a viable option for improving their financial circumstances.