- Personal Finance
IRS Tax Debt
Given the current troubled economic situation, naturally more and more people are considering filing for bankruptcy or are being forced into compulsory filing because of financial hardships. With the back taxes that are owed, the IRS has been seeing more people filing for a debtor protection as well. We all need a second chance sometimes and the laws pertaining to bankruptcy are supported by the IRS, allowing pardoning on some debts, even tax debts.
If there is a past due tax amount for the IRS that is quite significant, then is bankruptcy necessarily the only viable option for an individual? How can a bankruptcy affect your tax liabilities and the enforcement actions taken by the IRS? What is different about Chapter 7 and Chapter 13 bankruptcy filing options?
The Stay on Collections
The proceedings for a bankruptcy will start with filing a petition in bankruptcy court. Whichever bankruptcy option that you choose, filing the paperwork will put what's known as an automatic stay on any collections. A bankruptcy attorney will file the petition in the local jurisdiction and then and order of relief will be enacted to stop any creditors for making future attempts to collect on a debt (on debts that are open and owed when bankruptcy is filed).
The law pertaining to debtor protection actually governs the office of the IRS Insolvency Unit, that also takes care of bankruptcy cases. The stay will remain in place for many debtors as long as the bankruptcy stays open, and for a specific amount of time afterward to take into account any appeals that might take place. The stay does not allow the IRS to demand payment, neither in writing nor orally, and does not allow the IRS to collect in any manner including garnishing wages or bank accounts, seizing assets or offsetting the refund from the current year. In many cases the tax refund will be kept until a bankruptcy is discharged. Also, the interest that was accruing on an unpaid tax debt will stop, though once the bankruptcy is closed it could possibly be reassessed.