Can Filing Bankruptcy in Arizona Clear My Tax Debts?

If you owe tax debts to the government, you may be wondering whether filing bankruptcy can help you with your financial situation. The answer, unfortunately, isn’t short and simple. There are several factors that will go into determining whether your tax debts are dischargeable in bankruptcy. This could be a major motivation behind your reason to file. Or, another form of debt relief may be a more effective option for you. If you have additional questions after reading this article, call our office or use our online form to request your free consultation with one of our experienced bankruptcy lawyers.


Qualifying for Bankruptcy in Arizona

Before you find out if you can discharge your tax debt in bankruptcy, you need to make sure that you are eligible to file in the first place! Most people will qualify for one or both of Chapter 7 and Chapter 13 bankruptcy. Chapter 7, the more common type, clears away unsecured debts, but is only available to those who fall under certain income restrictions. Valuable assets won’t be protected in a Chapter 7 bankruptcy, either.

These restrictions don’t apply in a Chapter 13 bankruptcy. However, you need to have stable income that is sufficient to pay off a certain amount of debts over the course of 3 to 5 years. You can expect for all of your disposable monthly income to be tied up by the payment plan until it ends. Depending on your financial situation, you might be eligible to file both. The best way to know for sure is by speaking with an experienced Phoenix bankruptcy lawyer.

Is My Tax Debt a Priority Debt when it comes to Filing Bankruptcy in AZ?

Some tax debts are considered priority debts, while others aren’t. If your taxes aren’t priority debts, they are dischargeable in Chapter 7 bankruptcy. They will also be among the last category paid in a Chapter 13 payment plan, which also means they could be discharged with minimal repayment, depending on your disposable monthly income.

How do you know if your tax debts are priority debts or not?
There are several factors that must be met to exclude your tax debts from priority status. Factors that must be met to exclude tax debt from priority status include:
  • The tax debt is from at least 3 tax years prior;

  • You filed the tax returns at least 2 years ago;

  • The debt from the tax return was assessed at least 240 days prior; 

  • You didn’t commit tax fraud or tax evasion for the years in question. 

Clearly, these factors don’t allow for the discharge of recent tax debts. It also doesn’t allow you to catch up on past-due tax filings and discharge them immediately after in bankruptcy. But if your tax debts are a few years old and you haven’t been able to pay them off, bankruptcy could be an effective tool for you. Non-priority tax debts are treated like other unsecured debts, and will be discharged along with credit card debts and medical bills in Chapter 7 bankruptcy. These types of debts can also be discharged with minimal repayment in a Chapter 13 payment plan, depending on how much disposable monthly income you have left after paying your mandatory plan debts.

What if My Taxes Are Priority Debts?

If your tax debts don’t meet the requirements described above, they will be considered priority debts. While still unsecured, they are treated differently in bankruptcy than non-priority unsecured debts. Filing Chapter 7 bankruptcy will do nothing to get rid of them. If juggling other unsecured debts like credit cards and medical bills is what is keeping you from paying off your taxes, Chapter 7 could still help you in a roundabout way. But, if you don’t qualify for Chapter 7 bankruptcy, or Chapter 7 won’t do enough to help you with your financial situation, you should consider Chapter 13 bankruptcy.

A Chapter 13 Bankruptcy Filing is an Option

A Chapter 13 bankruptcy reorganization payment plan lasts either 3 or 5 years. Debts are sorted into four categories and paid off in a certain order. First, bankruptcy court, trustee, and attorney’s fees will be paid. Next, secured debts are paid in the payment plan. These are debts that have an asset attached as collateral to a loan. Most secured debts need to be fully paid off in a Chapter 13 payment plan, but most jurisdictions make an exception for a primary residence home mortgage.

The third type of debt paid in a Chapter 13 bankruptcy payment plan is priority debt. This is when your non-dischargeable tax debts would be paid in a Chapter 13 bankruptcy. It is also when other priority debts like student loans and child support arrearages would be paid. If there is any time left in your payment plan after all these debts have been paid, your plan payments will start going towards unsecured non-priority debt. These debts can be discharged without full repayment if your disposable monthly income doesn’t allow for it.


The Drawbacks of Filing Bankruptcy in Arizona – When it Might Not Be the Best Solution for Tax Debt

Bankruptcy might be a great way for you to address your tax debts, but it also could be quite inefficient, depending on your circumstances. Therefore, you might have priority debts that can’t be discharged in a Chapter 7 bankruptcy, but not enough income for your Chapter 13 plan proposal to be approved by the court. Maybe your tax debt is low in comparison to the rest of the debts you have, and the rest of your debts wouldn’t be discharged in bankruptcy or you could be at risk of losing your assets. Sometimes, even our bankruptcy lawyers have to admit that filing bankruptcy might not be best for you.

When you file bankruptcy, it will have a long-standing impact on your credit. The change in your credit score will depend mostly on how your credit was before filing. It will most likely plummet upon filing if you had a good score, but you may see a very small or even positive change if you had a mediocre or low credit score before filing your bankruptcy petition. The bankruptcy will show up on your credit report for 10 years if you file Chapter 7 bankruptcy. If you declare Chapter 13 bankruptcy in Arizona, it will remain on your credit report for 7 years. For either chapter of bankruptcy, you will be ineligible for most home mortgages for 2 years from the filing date. Depending on your plans for the future, these drawbacks might outweigh the benefits that bankruptcy offers.

Your Affordable, High-Quality Bankruptcy Firm in Arizona

When you have specialized issues like tax debt going into a bankruptcy, it’s important that you file with someone with the relevant expertise. Your Arizona bankruptcy attorney can help make sure that your bankruptcy experience involves as little stress as possible. Thus, you might assume that this is financially out of your reach, but our bankruptcy team makes discharging your debts surprisingly affordable.
Not only does our AZ Bankruptcy team offer competitive rates, but our Arizona Zero Down Bankruptcy Law Firm also offer innovative payment plans starting as low as zero dollars down. Get your creditors off your back and receive bankruptcy protection with affordable payments that start after your case has been filed. Plus, your payment plan can even help you improve your credit score after bankruptcy. To learn more, use our online form or call our office to schedule your free consultation with our experienced bankruptcy lawyers.