Five Essential Pre-Bankruptcy Steps to Manage Tax Debt in Bankruptcy
Are you struggling with tax debt and considering bankruptcy? With careful planning, you can effectively use bankruptcy rules to address your tax debt. Taking the proper steps before filing for bankruptcy can increase your chances of discharging (eliminating) eligible tax debt.
Here are five crucial steps to help you navigate tax debt before bankruptcy:
1. Wait for the Appropriate Time to File Your Bankruptcy Case
Many types of income tax debt become dischargeable after specific waiting periods. A key part of pre-bankruptcy planning is determining with your attorney when your tax debts meet these requirements.
While it’s sometimes impossible to wait due to pressure from creditors or tax authorities, your bankruptcy attorney can help you time your filing to discharge the maximum tax debt. Patience and strategic planning can make a significant difference.
2. File All Past-Due Tax Returns Immediately
If you owe back taxes, delaying filing your returns may be tempting, but it’s a mistake. Bankruptcy law requires at least two years after filing the relevant tax return before the associated tax debt becomes dischargeable.
Filing all overdue returns as soon as possible starts this clock and puts you in a better position to address your tax debt. Consult your attorney to ensure you’re protected during this period and receive guidance on managing the IRS or state tax authority.
3. Stay Current on Your Ongoing Tax Obligations
While preparing for bankruptcy, ensure you’re compliant with your current taxes. This includes appropriately withholding taxes from your paycheck and paying estimated quarterly taxes if you’re self-employed.
Ensure the IRS or state tax authority applies your payments to the current tax year. Staying compliant helps prevent aggressive collection actions and maximizes the taxes you can discharge when filing bankruptcy.
4. Avoid Tax Fraud, Evasion, and “Trust Fund” Taxes
Certain tax debts, including those related to fraud or evasion, cannot be discharged in bankruptcy. Always be transparent in your tax filings to avoid complications.
Similarly, trust fund taxes, such as payroll taxes withheld from employees, are not dischargeable. If you’re responsible for these taxes, prioritize paying them to avoid significant penalties or complications during bankruptcy.
5. Be Cautious of Tax Liens
A tax lien can complicate your bankruptcy case. Tax liens often survive Chapter 7 bankruptcy and must be paid in full during a Chapter 13 repayment plan. To minimize this risk, consult a tax professional to explore strategies for avoiding liens.
Additionally, avoid accruing equity in assets like real estate, which can attract liens and increase your tax liability. Even exempt assets may be subject to tax liens, so proper pre-bankruptcy planning is crucial.
The Importance of Pre-Bankruptcy Planning for Tax Debt
Dealing with tax debt before bankruptcy requires expert planning to ensure the best outcome. Your bankruptcy attorney will help you determine when and how to file to maximize the discharge of eligible tax debts.
Avoid tackling these strategies alone—this is one of the most complex areas of bankruptcy law. Consulting an experienced bankruptcy attorney ensures you navigate the process successfully and avoid costly mistakes.
Ready to Address Your Tax Debt? Let’s Talk
At the Law Office of Jeffrey K. Greenwell, PLLC, we specialize in helping Montana residents with bankruptcy and tax debt issues. If you’re considering bankruptcy to solve your tax problems, we’re here to help. Contact us today to schedule a consultation and take the first step toward financial freedom.
FAQs About Tax Debt and Bankruptcy
- Can all tax debt be discharged in bankruptcy?
No, only certain types of tax debt qualify for discharge. Eligibility depends on factors like the age of the debt, filing history, and compliance with tax laws. - How long must I wait before filing for bankruptcy to discharge tax debt?
In general, income tax debt can be discharged after specific waiting periods, such as three years from the due date of the return and two years after filing. - What are trust fund taxes, and why can’t they be discharged?
Trust fund taxes are withheld from employees’ paychecks, like payroll taxes. They are not dischargeable because they are considered funds held in trust for the government.
Optimize Your Financial Future Today
If you’re ready to explore your options for managing tax debt and achieving a fresh start, contact the Law Office of Jeffrey K. Greenwell, PLLC, to start the process. We’re dedicated to guiding individuals and businesses in Montana through bankruptcy and financial challenges.
