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People who are heavily in debt and find themselves unable to pay back what they owe to creditors have the option of filing for bankruptcy. Bankruptcy is a legal avenue that provides debt relief to consumers. Bankruptcy may also be used to stop a foreclosure of your home.
When all other efforts to correct your financial situation fail, you may think of bankruptcy. When you file for bankruptcy, it stays on your credit history for a period from 7 to 10 years.
Federal courts deal with bankruptcy cases. If you are thinking of filing for bankruptcy, it is advisable to seek the advice of a bankruptcy attorney and to file through one, so you know the filing is done properly. The bankruptcy attorney will also be present at all creditors meetings. You will have to provide the attorney with all the necessary information about your debts so that they can determine the best way to file your case.
Filing for bankruptcy helps you get a fresh start in the credit arena, as all your debts have to be written off. Collection is impossible beyond a certain point.
Bankruptcy is commonly filed under the four options available - Chapter 7 (liquidation of individuals and businesses), Chapter 11, Chapter 12 and Chapter 13, which deals with the reorganization for different individuals.
Types of Bankruptcy
Chapter 7
Chapter 7 Bankruptcy is a common option for individuals and businesses, as it is a complete relief bankruptcy. Chapter 7 is a liquidation bankruptcy, which is a discharge and forgiveness of debts for those who meet the criteria. Through this type of bankruptcy, your property is liquidated so that any secured debts are paid off.
Any unsecured debts that remain are discharged, and you are no longer responsible to pay them. There are certain eligibility criteria for this type of bankruptcy. It remains on your credit report for 10 years from the date of filing, and you may be considered a high credit risk by future lenders.
If you’re thinking of filing for personal bankruptcy, a qualified bankruptcy attorney can advise you if Chapter 7 fits your personal situation.
Chapter 11
This is a reorganization bankruptcy where a payment plan is agreed upon for debt repayment. It is available for individuals as well as businesses, but is used mostly by businesses, as it is very expensive and complicated with various rules and regulations.
The court supervises the reorganization of the company’s debt obligations.
Chapter 12
This is similar to Chapter 13 bankruptcy, but is specifically for farmers and fishermen. It provides for the release or exemption of property required for the maintenance and growth of the profession.
The length of repayment is 3 to 5 years. There are certain debts like wages, tax obligations and child support that must be paid.
Chapter 13
This is the most popular form of bankruptcy for individuals who do not fit the criteria for Chapter 7. The restructuring is for a period of 3 to 5 years and you need to have steady income for repayment purposes. Chapter 13 Bankruptcy remains in your credit history for 7 years from the date of filing.
Your bankruptcy case ends when your debts are paid off in full or part, and cannot pay anymore. It is the last option when you are unable to pay as it affects your credit rating for period of 7 to 10 years, depending on the state that you filed in.
Income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. Filing for bankruptcy is one of five ways to get out of tax debt, but you should consider bankruptcy only if you meet the requirements for discharging your taxes.
Chapter 7 provides for full discharge of allowable debts. Chapter 13 provides a payment plan to repay some debts, with the remainder of debts discharged. Under the new bankruptcy laws, tax debts are treated the same way in both Chapter 7 and Chapter 13 petitions. Not all tax debts are capable of being discharged in bankruptcy. The bankruptcy petitioner must have tax debts that meet five criteria for discharge.
Tax debts are associated with a particular tax return and tax year. The bankruptcy law lays out specific criteria for how old a tax debt should be.
Five Requirements to Discharge Tax Debts
If the income tax debt meets all five of these requirements, then the tax debt is dischargeable in Chapter 7 and Chapter 13 bankruptcy petitions.
1. The due date for filing a tax return is at least three years ago.
2. The tax return was filed at least two years ago.
3. The tax assessment is at least 240 days old.
4. The tax return was not fraudulent.
5. The taxpayer is not guilty of tax evasion.
Return Due At Least Three Years Ago
The tax debt must be related to a tax return that was due at least three years before the taxpayer files for bankruptcy. The due date includes any extensions.
Return Filed At Least Two Years Ago
The tax debt must be related to a tax return that was filed at least two years before the taxpayer files for bankruptcy. The time is measured from the date the taxpayer actually filed the return.
Tax Assessment At Least 240 Days Old
The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. The IRS assessment may arise from a self-reported balance due, an IRS final determination in an audit, or an IRS proposed assessment which has become final.
Tax Return was Not Fraudulent
The tax return cannot be fraudulent or frivolous.
Taxpayer Not Guilty of Tax Evasion
The taxpayer cannot be guilty of any intentional act of evading the tax laws.
Some Tax Debts Not Dischargeable
Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question.
Other Tax Issues in Bankruptcy
Before a Chapter 7 or Chapter 13 bankruptcy can be granted, the bankruptcy petitioner is required to prove that the four previous tax returns have been filed with the IRS. The four previous tax returns must be filed no later than the date of the first creditors' meeting in a bankruptcy case.
Additionally, bankruptcy petitioners are required to provide a copy of their most recent tax return to the bankruptcy court. Creditors can also request a copy of the tax return, and petitioners must provide a copy to them.
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