Mounting debt and troublesome financial situations can affect those in any income bracket. Unexpected changes such as a divorce or business dissolution can require life-altering reorganization. Meanwhile, the way you protect your interests could affect your tax liability.
Depending on your circumstances, bankruptcy may be a viable solution. However, answers to some common questions about the connection between debt resolution and tax relief could help you decide how to address your economic concerns. For example:
Will bankruptcy absolve my responsibility for delinquent taxes? If you cannot afford to pay your entire tax bill in one lump sum, the IRS may agree to an offer in compromise or monthly installment plan, since you typically cannot resolve tax debt in bankruptcy. However, a court could factor business ownership and the involved chapter into a decision to discharge past-due taxes.
What rights does the IRS have to collect delinquent taxes? The agency has 10 years from the assessment date to collect past-due debt. Collections efforts could involve a federal lien against your assets, including financial accounts and wages, or levied property. However, when you file bankruptcy, an automatic stay goes into effect. Regardless of chapter, business ownership or individual debt, an automatic stay prohibits further attempts to collect money owed, such as calls, court proceedings, liens, foreclosures and repossessions. As such, you could take action against the IRS if collections efforts violate a related discharge injunction.
When must I resume payments? Although collection attempts must stop after a bankruptcy filing, you must continue to file tax returns. Meanwhile, you may continue to receive annual summaries of your owed taxes. If you’re able, you can choose to make payments during bankruptcy proceedings. Voluntary payments could help:
- Prevent collection efforts post-bankruptcy
- Lower the amount of accrued interest
- Decrease your tax bill
Because an automatic stay ends once your bankruptcy is closed, you must then either pay your outstanding taxes or establish terms according to which you will satisfy your liability. Collections efforts may also resume.
Bankruptcy trends and the pandemic
Despite economic stimulus payments and mortgage assistance, many Americans experienced monetary struggles this year. Yet, according to bankruptcy statistics released this summer, bankruptcy filings decreased between June 2019 and June 2020.
During the 12-month period which ended June 30, United States courts commenced 682,363 bankruptcy cases. Within the same dates the previous year, that total reached 773,361.
However, is a slight decrease an accurate representation of the 2020 economic downturn? Considering the time frame of these statistics, ending shortly after adopted pandemic responses began, there’s a good chance they are not.
Speculation might anticipate bankruptcies will increase next year. However, while still navigating tumultuous financial circumstances, it is too soon to say how extensively the global health crisis will impact debt resolution needs as the nation recovers.
Depending on how financial accounts balance over the upcoming months, debt could become more problematic. If so, learning about how bankruptcy could affect tax liability may be the determining factor in reaching resolution.