As the saying goes, there is nothing certain in life except death and taxes. Although a Chapter 13 bankruptcy filing won't necessarily kill a person, it is likely to negatively impact taxes. Tennessee residents looking to get rid of overwhelming debt may want to think twice before rushing out to file for bankruptcy. As with many things, timing is everything, so filing at the right time will reduce tax liability.
As anyone who has ever done their own taxes knows, the IRS has many tax rules in place. For example, if a person is being audited, filing for Chapter 13 bankruptcy will not stop the audit. Collection action will stop, but the statute of limitations will be extended.
Another thing to understand is that bankruptcy cannot eliminate all tax debt. Priority debt - such as penalties from a trust fund and any fraud assessments must be repaid. The same goes for student loans, child support and fines incurred from committing a crime (such as drunk driving).
Even taxes may not be fully discharged in bankruptcy. The only exceptions are personal income taxes that are at least three years old and were filed by the taxpayer. If tax returns were never filed, any taxes owed cannot be discharged, no matter what year they are from.
A Chapter 13 bankruptcy helps debtors restructure their debt so that they can keep all their assets but repay the debt on more favorable terms. However, it is important to be aware that it cannot wipe out tax debt, so other options - such as payment plan through the IRS or an offer in compromise - may be more suitable for some debtors.
Source: FOX Business, "How Bankruptcy Impacts Your Taxes," Bonnie Lee, July 25, 2013