Bankruptcy is an important tool that can give South Carolinians a fresh financial start. There are many different types of debt that can be discharged in bankruptcy and some that cannot. Some debtors may erroneously assume that tax debts cannot be discharged in bankruptcy. This is not always the case.
If certain legal requirements are met, tax debts can be discharged in bankruptcy. This can provide much-needed relief to debtors who are burdened by heavy tax liabilities.
What Tax Debt Can Be Discharged?
Forbes discusses some of the basic conditions for discharging tax debts in bankruptcy. It is not surprising that tax debts cannot be forgiven for taxes that were willfully evaded, or which were assessed under a fraudulent tax return. Taxes also cannot be discharged if no return was filed. Withholding taxes cannot be discharged – if, for example, an employer withheld taxes from employee payroll, but failed to pay these withholdings to the IRS.
Other than these hard and fast rules, the criteria for discharge are largely a matter of timing. The tax debt must be associated with a return that was due at least three years before the bankruptcy was filed, and filed within two years of the bankruptcy filing. The debt must have then been assessed at least 240 days before the bankruptcy filing. These deadlines are sometimes referred to as the 3/2/240 rule.
The 3/2/240 rule makes the timely filing of a tax return a prerequisite for discharging that debt in bankruptcy. This is why it is so important to file tax returns on time, even if you know there will be a debt, penalty, or other assessment. This is the only way to protect your ability to later discharge the debt in bankruptcy.
How To Manage Tax Debt That Cannot Be Discharged
Even if tax debt cannot be discharged in bankruptcy, there are other options for managing the debt. Payment plans can be negotiated with the IRS or South Carolina Department of Revenue. Discharging other debts (such as credit cards and medical debt) in bankruptcy can free up income to make payments on a tax debt. Consolidating or refinancing debt can reduce interest payments, freeing up further income for tax debt payments.
These same strategies can also be used to help debtors manage other debts that cannot be discharged in bankruptcy. These include family support obligations (such as child support and alimony), as well as penalties for willful violations of the law (such as fines, court fees, or criminal restitution orders). Student loans are also generally unable to be discharged unless the debtor can prove that it would be an undue burden to repay them. This is a high standard, which usually requires proof of a disability or some other serious condition that prevents the debtor from working. Debt which is not listed in a bankruptcy petition is also generally unable to be discharged.
There are many strategies that can effectively manage debt in order to help create a fresh financial start. A South Carolina bankruptcy attorney can help debtors plan appropriately for exempting assets and discharging tax debt in the bankruptcy process.