Bankruptcy and Taxes in Massachusetts: What You Need to Know

Filing for bankruptcy can be a complex and daunting process, especially when considering the implications it has on taxes in Massachusetts. Understanding the relationship between bankruptcy and taxes is crucial for individuals and businesses navigating financial difficulties. In this article, we will cover essential aspects that you need to know about bankruptcy and taxes in Massachusetts.

Types of Bankruptcy in Massachusetts

In Massachusetts, individuals and businesses can file for different types of bankruptcy under federal law. The most common types are:

Chapter 7 Bankruptcy: Also known as liquidation bankruptcy, this type allows individuals to discharge most unsecured debts, including credit card debt and medical bills. However, certain debts, like tax obligations, may not be fully discharged.
Chapter 13 Bankruptcy: This form of bankruptcy enables individuals to create a repayment plan to pay off debts over a period of three to five years. This option can protect assets from liquidation.
Chapter 11 Bankruptcy: Typically used by businesses, this type allows for reorganization and aims to keep the business operational while paying creditors over time.

Taxes and Bankruptcy Discharge

One of the critical concerns during bankruptcy is how it affects tax liabilities. In Massachusetts, as in other states, certain tax debts can be discharged depending on the timing and nature of the tax:

Income Taxes: Income taxes may be dischargeable if they meet specific criteria, including that the tax return was due at least three years before filing, the return was filed at least two years before bankruptcy, and the tax was assessed at least 240 days prior to the filing.
Payroll Taxes: These are generally not dischargeable in bankruptcy. Employers are held responsible for payroll taxes, and failing to pay them can lead to severe penalties.
Property Taxes: Property taxes that are overdue may also be dischargeable if they meet certain time limits.

Filing Your Taxes After Bankruptcy

After filing for bankruptcy in Massachusetts, it is essential to continue filing your tax returns on time. Failing to do so could lead to complications:

Post-Bankruptcy Returns: You are still required to file returns for taxable years that fall after your bankruptcy is filed. Any unpaid taxes may become a priority debt.
Impact on Credit Score: While bankruptcy significantly affects your credit score, timely filing of your taxes can help establish a fresh financial start.

The Role of a Bankruptcy Attorney

Navigating the intricate relationship between bankruptcy and taxes can be overwhelming. Working with a bankruptcy attorney who understands Massachusetts laws is vital. They can help you:

Understand which debts are dischargeable.
Navigate tax implications associated with bankruptcy filing.
Develop a strategy to handle existing tax liabilities effectively.

Conclusion

Bankruptcy can provide a crucial lifeline for individuals and businesses facing overwhelming debt. However, understanding its relationship with taxes in Massachusetts is essential to make informed decisions. Always consider consulting with a professional to ensure that your rights are protected and that you can navigate your financial challenges successfully.