Articles Tagged with tax debt

chapter 7 bankruptcy vs chapter 13 bankruptcyFiling for bankruptcy can be a powerful tool for debt consolidation and relief. It can help you get out from under the financial burden weighing you down. If you’re considering filing for bankruptcy, you may be wondering whether you should file Chapter 7 bankruptcy or file Chapter 13 bankruptcy. The right choice depends on your current income, assets, debts, and your future financial goals.

What are the Major Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy?

Chapter 7 bankruptcy can be a relatively quick way to wipe out general, unsecured debt like medical bills and credit cards, and it requires no repayment. It is designed for people with little to no disposable income available to pay back debt. Although it wipes out most debts, it doesn’t clear particular types of debt such as taxes, student loans, or unpaid child support and alimony. When you file Chapter 7 bankruptcy, your nonexempt property is sold to pay back your creditors. The “means test” will help determine if you’re eligible to file Chapter 7 bankruptcy. If you make more than the median income of your state and have some disposable income to pay off debt you may be forced to file Chapter 13 instead.

Man Looking at ComputerWhen you owe tax money to the federal government, there are certain collection methods that are unique to the IRS. The federal government is permitted to take more extreme measures to collect money than typical debt collectors. These measures can include placing liens and levies on your property. If you are facing an IRS lien or levy, contact a Jacksonville bankruptcy attorney to learn about your options. Liens and levies have different consequences for your financial future.

What is a Federal Tax Lien?

If you fail or neglect to pay a tax debt on time, the federal government can make a legal claim on the property you own. This claim is called a tax lien. Your property basically becomes collateral to insure the debt that you owe the IRS. A lien includes all of your property for the amount of the tax liability. This includes real estate, savings accounts and other personal assets. A lien is publicly recorded and will have a negative impact on your credit report.

a calculator and pencil on graph paperFalling on hard times financially can also lead to falling behind on your taxes. When your tax debt becomes extremely delinquent, the IRS may issue a garnishment on your wages. This garnishment, or levy, allows the IRS to take part of your wages each pay period. A garnishment will continue until you: A. make other arrangements to pay off your tax debt; B. your debt has been paid in full; or C. the levy has been released. Overwhelmed by the thought of losing your wages, you may wonder if filing for bankruptcy will relieve you from an IRS garnishment.

Filing for bankruptcy can in fact offer some relief from the stress of an IRS garnishment. Once you file bankruptcy, a court ordered automatic stay will immediately go into effect. This stay will stop any type of debt collection, including garnishments and seizures, for the duration of the bankruptcy case. However, since bankruptcy will not get rid of most tax debts, how your garnishment is affected after the case is over will depend on which type of bankruptcy is filed: Chapter 7 or Chapter 13.

In a Chapter 7 bankruptcy filing, all of your dischargeable debts will be wiped out. Since most tax debts are not dischargeable, they will remain. The IRS garnishment will, however, be temporarily halted due to the automatic stay while your bankruptcy case is processed. When your case is over, you will still owe on your tax debt. For this reason, while Chapter 7 can offer a window of relief, it does not offer a long-term solution to the situation.