If you’re struggling with debt, you may be wondering, How does bankruptcy affect my tax obligations in Georgia? Understanding what tax debts can be discharged and what remains your responsibility is crucial.

In Georgia, while some tax debts might be dischargeable in bankruptcy (especially income taxes older than three years that meet specific criteria), others may not be. Additionally, you are still required to file tax returns and pay current taxes during the bankruptcy process.

With decades of experience helping individuals navigate bankruptcy and tax issues, I’ve guided countless clients through the complexities of eliminating or managing tax debt. Let’s explore how bankruptcy impacts taxes in Georgia and what you need to know.

 

Understanding Bankruptcy and Taxes in Georgia

You may know that bankruptcy is a legal solution for discharging debt, but you might not realize that the process can also help resolve taxes. Despite the fact that these are amounts due to the government, it is possible to include tax debt in a bankruptcy case. Of course, because you are dealing with the Internal Revenue Service (IRS), you can expect there to be many rules and exceptions. Some of these relate to your eligibility to discharge tax, but a wide array of complications may also apply. Therefore, one of the first priorities is finding out what you need to know about bankruptcy and taxes in Georgia.

Chapter 7 and Chapter 13 generally have similar outcomes in that you discharge qualifying debt. There are very different requirements for each, but the result of the process is that you are debt-free. If you are eligible, your income tax debt could be treated similarly, and you will not owe the government additional amounts.

It is wise to retain legal help for any Chapter 7 or Chapter 13 case, but this is especially true with bankruptcy and taxes. You can count on a Georgia bankruptcy lawyer, and read on for a useful overview about the relevant laws.

Summary of Chapter 7 Laws

Chapter 7 is known as discharge bankruptcy because it allows you to wipe out all qualifying debt through the process. Still, there is liquidation with this type of bankruptcy. This means the bankruptcy trustee has the legal authority to sell your assets to pay back creditors. The rules to qualify for Chapter 7 are relatively strict because they aim to support only those debtors who truly need it. You must meet one of the following to be eligible:

 

1. Your pay falls below the state median income for Georgia, for a household of your size.
2. If your wages are higher, you may qualify through the Means Test. In addition to income, your monthly expenses are considered.

 

A Chapter 7 bankruptcy case lasts around 4 to 6 months, at which point you emerge debt-free.

Income Taxes in Chapter 7 Bankruptcy 

The key with bankruptcy is that you can discharge qualifying debt, and there are some debts that are not able to be eliminated. Fortunately, many debtors can wipe out income tax because the Internal Revenue Code (IRC) covers Chapter 7. Initially, you must meet the criteria to file. Then, you need to be eligible under additional laws regarding discharge of income taxes.

 

• Your income taxes date back more than 3 years, based upon when your tax return was due.
• You filed your income tax return at least 2 years ago, even if you did not pay.
• Your income taxes were assessed by the IRS at least 240 days ago. This deadline can be longer if you previously filed bankruptcy.
• You did not engage in any fraud or willful evasion in not filing your tax return, which includes your spouse if you are filing jointly.

 

You must meet each of these eligibility rules to discharge income taxes under Chapter 7.

Overview of Chapter 13 Bankruptcy

You can also eliminate qualifying debt with Chapter 13 bankruptcy, but the rules and process are different compared to Chapter 7. For one, the criteria to qualify are simplified. You must have a job for Chapter 13, because the focus of your case is a debt repayment plan. As a summary:

 

• Your debts are reorganized and combined, and then classified as priority and nonpriority debts.
• The total amount of debt due is reduced to an amount that you can afford to pay monthly, based upon your income.
• You pay according to the terms of this debt repayment plan for 3 to 5 years, at which point your qualifying debts are cleared.

 

With respect to taxes, there are also IRC provisions on Chapter 13. It is possible to discharge income taxes, and the key lies in how they are classified. By default, your income taxes will be considered priority debt that you must pay in full through your Chapter 13 debt repayment plan.

 

However, if you can prove that your income taxes are nonpriority debt, they could be eliminated. The same eligibility rules apply as far as the deadlines mentioned above for Chapter 7. You will have to pay some through your debt repayment plan, and the remaining may be wiped out.

Other Dischargeable Debt in Bankruptcy

It is crucial to note that you cannot eliminate tax debt in either Chapter 7 or Chapter 13 if it has already transformed into a tax lien. This means the IRS has placed an encumbrance on real estate or other assets that you own. In addition, keep in mind that these rules only apply to income taxes. Taxes for property, business, employment, gift, inheritance, and many others are not dischargeable in bankruptcy.

 

With respect to non-tax matters, the following cannot be wiped out with Chapter 7 or Chapter 13:

 

• Alimony;
• Child support;
• Certain fees and fines payable to government; and,
• Judgments from DUI personal injury lawsuits.

 

Bankruptcy is primarily dedicated to getting rid of unsecured debt, such as credit cards, medical debt, personal loans, and lines of credit. You cannot eliminate secured debts through Chapter 7 or Chapter 13, because the lender has collateral through which to seek payment.

Resolving Taxes with the IRS

When looking at what you need to know about bankruptcy and taxes, you should also consider options to resolve tax debt without filing for Chapter 7 or Chapter 13. For instance:

 

• You might be eligible to work out a short-term payment plan, in which you pay taxes back through a period of 180 days. A long-term payment plan is also possible, and you pay monthly for more than 180 days. For these remedies, you must have less than $100,000 in unpaid taxes, penalties, and interest.
• IRC rules feature an Offer in Compromise, where you can enter into an agreement with the IRS to pay back taxes in an amount that is less than what you owe.
• In some cases, you may qualify for relief from IRS penalties. You will still owe taxes, but getting rid of these penalties can help you pay back taxes.

 

Additional Facts About Bankruptcy

As you review your options for discharging back taxes and other debt, you should be aware of a few rules and benefits that apply with Chapter 7 and Chapter 13. 

 

• With both types of bankruptcy, you clear the slate with debt and get a fresh start with new financial opportunities.
• Upon filing a petition for Chapter 7 or Chapter 13, the bankruptcy court issues an automatic stay on creditor efforts to collect debt. Creditors cannot file a lawsuit, garnish wages, or place liens on your property. 
• The automatic stay in bankruptcy also initially stops foreclosure on your home, but the lender can ask the court to lift the stay. If allowed, the bank can begin or continue the foreclosure process.
• Though you do risk losing assets through Chapter 7 liquidation, you have the advantage of exemptions. These laws can be used to protect your equity in your home, vehicles, personal belongings, and work equipment.
• Besides the eligibility criteria for each type of bankruptcy, you should note that there are time restrictions when filing a subsequent case. If you opt for Chapter 7, you must wait 8 years to file another case and 6 years for Chapter 13. When filing Chapter 13, you have to allow 2 to 4 years.
• A bankruptcy case will result in a dip in your credit score, possibly up to a few hundred points depending on your situation. A Chapter 7 case will remain on your credit report for 10 years after filing, and a Chapter 13 stays for 7 years.

Tips for Bankruptcy Cases

One of the most important recommendations with bankruptcy and taxes is to retain legal representation to assist with your case. You will need guidance regarding whether Chapter 7 or Chapter 13 is the right fit for your goals, needs, and debts. When you want to discharge taxes through bankruptcy, it is critical to get advice regarding the specific, complex requirements. Plus, an experienced Georgia bankruptcy attorney will handle all documents, filings, and court proceedings. 

 

Some additional tips for Chapter 7 and Chapter 13 cases include:

 

• Make sure to consider your options for bankruptcy if you are married. You could file an individual petition, but there are also advantages to filing a joint petition to eliminate debt.
• Do not be tempted to take out of your retirement to pay debt as a way to avoid bankruptcy. Your retirement savings are exempt from the bankruptcy process if they are covered by ERISA, so they cannot be used to pay back creditors.
• Though your credit score may take a hit, there are ways to rebuild credit. Tips include paying bills on time and getting a secured credit card to show a track record of financial responsibilities.
• If you own a business, you should realize that you can discharge some personal guarantees through bankruptcy. Chapter 13 allows you to keep your business in doing so.

Contact a Georgia Bankruptcy Attorney to Discuss Tax Matters

This overview covers the basics on what you need to know about bankruptcy and taxes in Georgia, but there are many additional details. At Morgan & Morgan, Attorneys at Law, P.C., our team is ready for challenges and always strives for the best possible outcome with all qualifying debt. For more information on our services for Chapter 7 and Chapter 13, please contact our offices in Athens, GA. We can schedule a free consultation with a knowledgeable Georgia bankruptcy lawyer.