With the tax season in full swing the issue of back taxes may be on your mind. You can use a Chapter 7 Bankruptcy filing to eliminate all income taxes except the following tax liabilities:
a. The taxes are for a tax return due within three years (plus extensions) prior to the date of the filing of your bankruptcy.
For example, despite taking every deduction imaginable and creative accounting you were shocked to find that you still owed Uncle Sam in your 2007 tax return. The due date for your 2007 tax return would have been April 15, 2007. Therefore, these income taxes cannot be discharged by filing bankruptcy on or before April 15, 2010 (plus the time of extensions). If you get an extension do not forget to account for it. File too early and you lose the ability to discharge the tax liability.
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b. The taxes were assessed by the IRS within 240 days before the filing of your bankruptcy. If you are not certain of the assessment date you can request a record of the assessment from the IRS.
For example, in December 15, 2011 Uncle Sam has audited you and you now owe an additional $2,000.00 from your income in 2006. This income would be reflected in your 2007 tax return. Unfortunately, the $2,000.00 would not be dischargeable until August 11, 2012 or 240 days later.
c. Taxes not yet assessed against you, but that the IRS maintains the right to asses.
d. The taxes are for a tax return that was filed late AND filed within two years prior to filing bankruptcy.
e. The individual owing taxes has committed fraud related to a tax return or otherwise has knowingly attempted to evade taxation.
If your income taxes are not ensnared by any of the exceptions above then they may be wiped out in a Chapter 7 Bankruptcy. Consult a knowledgeable bankruptcy attorney for guidance and analysis of your specific situation.
It is fairly common for a married individual to file for bankruptcy protection without their spouse. This often occurs for reasons such as:
1. Only that individual has debt or more importantly unmanageable debt
2. The other spouse cannot file because of a previous bankruptcy case
3. One spouse objects to filing on principle or wants to maintain good credit
What most individuals may not know is that even if only one spouse is filing, all household income is used for bankruptcy calculations. This means that the non-filing spouse's income is counted towards the filing spouse's household income. Obviously, the filing spouse gets to count the spouse and any dependents as part of his or her household.
This is why the Marital Adjustment is so important. Marital Adjustment allows the reduction of your Current Monthly Income by expenses made by the non-filing spouse. These expenses cannot benefit you or your dependents such as your children. The most obvious examples would be something like separate debts such as a car payment, child support or alimony paid by the non-filing spouse. Do not forget the non-filing spouse's payroll deductions such as 401k, 403b, plan loans, IRA contributions. It may also be possible for the non-filing spouse to exclude expenses for hobbies, gym memberships and recreation. As always, discuss these matters with a capable bankruptcy lawyer to get legal advice.
In conclusion, Marital Adjustment can be the difference between filing a chapter 7 or a chapter 13 so look at you situation closely and disclose the information to your bankruptcy lawyer. Furthermore, Marital Adjustment can reduce the amount of disposable income available to fund a plan in chapter 13.
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