New Jersey residents who file for bankruptcy may want to think about how it may impact their taxes before doing so. Chapter 7 Bankruptcy is most commonly used to eliminate unsecured debt, and it can help individuals who have more debt than they can realistically pay back get back on their feet. However, depending on someone’s tax situation, it may be a good idea to delay filing.
The reason for this is that in some cases, filing for bankruptcy can eliminate debt that an individual owes the government for back taxes. Tax debt that can be eliminated by bankruptcy must be at least three years old from the date of filing, including any extensions for filing. Debt that has not had a return filed for it is not considered eligible. Additionally, at least 240 days of assessments must have gone by. Therefore, if someone filed their taxes and then filed for bankruptcy immediately, money owed to the IRS would probably not be discharged by the bankruptcy.
It is also important to note that certain debts will not be eliminated by a Chapter 7 Bankruptcy. These debts are called priority debts. They include child support, student loans and drunk driving fees. This type of debt may be able to be handled by filing for Chapter 13 bankruptcy, but it does not wipe out the debt, it only reorganizes it and gives an individual more time to pay it off.
Filing for bankruptcy can be helpful to someone who is drowning in debt, but to get the most benefit from it, individuals need to know what is involved. A lawyer could explain the bankruptcy process and help someone with their filing.
Source: Fox Business, “How Bankruptcy Impacts Your Taxes“, Bonnie Lee, July 25, 2013