How to Handle IRS Debt During Bankruptcy in Massachusetts

How to Handle IRS Debt During Bankruptcy in Massachusetts

Dealing with IRS debt can be one of the most stressful aspects of filing for bankruptcy. In Massachusetts, understanding how the bankruptcy process interacts with tax debts is crucial for individuals seeking relief from overwhelming financial obligations. Below, we’ll outline essential steps to effectively handle IRS debt during bankruptcy proceedings.

Understanding IRS Debt in Bankruptcy

When you file for bankruptcy in Massachusetts, the treatment of your IRS debt largely depends on the type of bankruptcy you choose—Chapter 7 or Chapter 13.

Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, most unsecured debts are discharged, but tax liabilities may not be easily dismissed. To qualify for tax debt discharge under Chapter 7, you must meet specific criteria:

  • The tax must be owed for a tax return that was due at least three years before your bankruptcy filing.
  • The tax return must have been filed for at least two years prior to filing for bankruptcy.
  • The tax assessment must have been made at least 240 days before filing for bankruptcy.
  • The taxes must be personal income taxes and not related to trust fund taxes or fraud.

If you meet these criteria, you may be able to discharge your IRS debt. However, if your debt does not qualify, you may still have to address it in your bankruptcy plan.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows individuals to create a repayment plan to pay back their debts over three to five years. IRS debts can often be included in this repayment plan, which allows for more manageable payment terms. Here’s how it works:

  • You will typically have to pay back the priority claims (which includes certain types of tax debts) in full during your repayment period.
  • Nonpriority tax claims may be paid at a reduced amount, depending on your disposable income and overall debt situation.

This method can provide relief by consolidating your debts, potentially reducing the amount you owe, and giving you a structured timeline to eliminate debts.

Tax Returns and Compliance

Regardless of the bankruptcy chapter chosen, it's crucial to keep up with your tax filings. You must be current on your tax returns to proceed with bankruptcy. If you haven’t filed your tax returns recently, you’ll need to do so before your bankruptcy case can be processed. Failure to comply can complicate your bankruptcy case and potentially lead to dismissal.

Seek Professional Advice

Navigating IRS debt and bankruptcy laws can be complicated. It’s highly advisable to consult with a bankruptcy attorney who understands the nuances of tax debt in Massachusetts. They can help you evaluate your situation, determine which bankruptcy chapter is best for you, and ensure that you meet all requirements to maximize your debt relief options.

Conclusion

Handling IRS debt during bankruptcy in Massachusetts requires careful planning and understanding of the legal landscape. By knowing what to expect and following these guidelines, you can effectively manage your IRS obligations while finding a path to financial recovery. Ensure you stay informed and work with professionals to achieve the best results for your unique situation.