Bankruptcy

• Bankruptcy is a legal process where a debtor can be absolved of his debt liability, with some limitations. Individuals typically file bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 7 is a total liquidation of assets where Chapter 13 is a reorganization of the debt. Through a Chapter 13, a debtor satisfies his debt through a three-to-five-year repayment plan. Under Chapter 13, the debtor is also able to keep his assets, such as his home, which would normally be sold off during a Chapter 7. To qualify for a Chapter 13 bankruptcy, the debtor must have a regular income; to qualify for Chapter 7, the debtor cannot be eligible for Chapter 13.
  
  

Bankruptcy Limitations

• All unsecured debt is absolved during bankruptcy. However, debt resulting from delinquent child support or alimony is not wiped out in bankruptcy, regardless of what chapter you file. Additionally, past due personal income taxes, whether they are state or federal taxes, are also generally not erased during bankruptcy.
  
  

Tax Bankruptcy

• For taxes to be discharged through tax bankruptcy, the taxes must be at least three years old. The taxes must also have been voluntarily filed by the debtor at least two years prior and were assessed by the Internal Revenue Service (IRS) 240 or more days prior to the date the debtor filed for bankruptcy. However, remain mindful that Bankruptcy tax discharge is such a tricky and complicated matter that even bankruptcy lawyers have difficulty predicting debtor eligibility. It most cases, debtors do not qualify.
  
  

Tax Bankruptcy Limitations

• Priority taxes -- that is, income taxes that are less than three years old or were assessed within the last 240 days preceding the bankruptcy filing, cannot be discharged through bankruptcy. Additionally, failure to file taxes on time or any attempt to evade tax obligations will cause the debtor to forfeit her right to have her tax debt discharged. Individuals who do not qualify for a tax discharge will have to pay the taxes in full, or a portion of those taxes through a Chapter 13 repayment plan.