Bankruptcy and Unpaid Taxes: What You Should Know in Massachusetts

Bankruptcy and Unpaid Taxes: What You Should Know in Massachusetts

Bankruptcy can be a daunting process, especially when it comes to dealing with unpaid taxes. If you reside in Massachusetts and are considering bankruptcy, it’s crucial to understand how unpaid tax obligations can affect your financial situation and the bankruptcy process.

For individuals filing for bankruptcy in Massachusetts, the two most common types of bankruptcy are Chapter 7 and Chapter 13. Each type has different implications when it comes to unpaid taxes. In Chapter 7 bankruptcy, your non-exempt assets may be liquidated to pay off creditors, while Chapter 13 allows you to reorganize your debts and create a repayment plan over three to five years.

When it comes to unpaid taxes, the IRS and state tax authorities have specific rules regarding tax debts and bankruptcy. Generally, income tax debts can be discharged in bankruptcy if they meet certain criteria:

  • The tax return must have been due at least three years before the bankruptcy filing.
  • The tax return must have been filed at least two years prior to filing for bankruptcy.
  • The tax assessment must have been made at least 240 days before filing for bankruptcy.

It’s important to note that certain tax debts, such as payroll taxes, fraud penalties, or those arising from unfiled tax returns, cannot be discharged in bankruptcy.

In Massachusetts, state income taxes are treated similarly to federal taxes in bankruptcy proceedings. To effectively discharge state tax debts, they must also meet the conditions mentioned above. This includes ensuring the tax is not secured by a lien, as secured tax debts cannot be discharged.

If you decide to file for Chapter 7 bankruptcy, unpaid tax debts that qualify for discharge will be eliminated, allowing you to start fresh. However, if you are considering Chapter 13, you may need to create a repayment plan to pay your tax debts over time, along with your other debts.

It's essential to gather all relevant tax documents and ensure you are compliant with IRS regulations before filing for bankruptcy. The bankruptcy process can be complex, and it’s advisable to consult with a qualified bankruptcy attorney who understands both federal and Massachusetts state laws. They can offer expert advice tailored to your specific situation, helping you navigate the intricate waters of bankruptcy and unpaid taxes.

In conclusion, understanding the relationship between bankruptcy and unpaid taxes in Massachusetts can significantly impact your financial recovery. Knowing what debts can be discharged, the eligibility requirements, and the importance of proper legal guidance are key components to successfully managing your bankruptcy proceedings while addressing unpaid taxes.