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Taxes, debt and bankruptcy

Taxes are weighing heavily on the minds of a lot of people at this time of year.

For some people, however, it's their old tax debt that weighs down on them the most.

Can bankruptcy eliminate tax debt?

Some people do qualify for federal tax relief if they file for Chapter 7, or "total" bankruptcy. However, they have to meet very specific conditions. In order to determine if you qualify for tax relief through bankruptcy, ask yourself the following questions:

1. Have all your taxes been filed? If you haven't filed all your tax returns at least two years prior to your bankruptcy, you aren't eligible for relief.

2. Is the debt at least 240 days old? In other words, the court needs to know that you had ample opportunity to figure out a way to pay the debt and jumping to bankruptcy wasn't your first option.

3. Are the tax years involved at least three years ago? Debt from the last two years can't be discharged.

4. Have you been convicted of purposeful tax evasion or fraud? The majority of people who get into trouble with their taxes do so through either legitimate mistakes or failure to file. Often, they may not realize they even need to file. However, if the Internal Revenue Service (IRS) decided that you purposefully lied on your tax forms, you can't receive tax relief through bankruptcy.

It's also important to note that your timing is critical. While you can't file early, you can't wait until the IRS places a lien against your home or other property. If you do, the lien will remain even after your bankruptcy is discharged and you won't be able to sell your home or other property without paying it off.

Taxes and bankruptcy have a complicated relationship, which makes it wise to consult an attorney as soon as you begin thinking about the possibility.

Source: FindLaw, "Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy," accessed Jan. 12, 2018

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