How to Address Tax Liabilities in Bankruptcy in Colorado

How to Address Tax Liabilities in Bankruptcy in Colorado

When facing bankruptcy in Colorado, understanding how to address tax liabilities is essential for ensuring a smoother financial recovery. Navigating the complexities of both tax law and bankruptcy law can be challenging, but knowing your options can help manage or potentially eliminate these liabilities.

Understanding Bankruptcy Types

In Colorado, the two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. Each type impacts tax liabilities differently.

Chapter 7 Bankruptcy

Chapter 7 is often referred to as liquidation bankruptcy. In this case, non-exempt assets are sold to pay off creditors. However, certain tax debts may be discharged (eliminated) in a Chapter 7 filing if specific criteria are met:

  • The tax return was due at least three years before filing.
  • The tax return was filed at least two years before filing.
  • The tax assessment was made at least 240 days before filing.

It's important to note that tax debts related to fraud or willful evasion cannot be discharged. Consulting with a bankruptcy attorney can help determine if your tax liabilities qualify for discharge.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is designed for individuals with regular income who wish to repay their debts over a three to five-year plan. This type of bankruptcy can be advantageous for taxpayers as it allows them to catch up on overdue tax payments while staying protected from collections. Here’s how it works:

  • Unsecured tax debts can often be discharged at the end of the repayment plan.
  • Secured tax debts, such as those with liens, must be paid in full by the end of the plan.
  • The repayment plan may allow you to make monthly payments towards tax debts, helping to relieve immediate financial pressure.

Filing Taxes During Bankruptcy

Taxpayers filing for bankruptcy must also continue to file their tax returns. Failure to do so can result in penalties and complications with the bankruptcy process. It's crucial to keep accurate records and communicate openly with your tax attorney about your financial situation.

Dealing with Unfiled Returns

If you have unfiled tax returns that are due, it's advisable to file them before or during your bankruptcy proceedings. Although unfiled tax returns can complicate matters, filing can help prevent the IRS from claiming that you are trying to evade taxes.

Tax Consequences of Bankruptcy

Filing for bankruptcy can also have tax implications. For example, discharging debts, including certain tax debts, may lead to a taxable event. Specifically, the IRS expects you to report canceled debt as income. Nonetheless, many taxpayers qualify for insolvency exceptions, meaning they may not owe taxes on discharged debts.

Seek Professional Help

Addressing tax liabilities in bankruptcy can be intricate, and the laws are subject to change. Partnering with a knowledgeable bankruptcy attorney and a certified public accountant (CPA) who understands both bankruptcy and tax implications can be invaluable. They can guide you through the process and help you make informed decisions, ensuring compliance with the law while aiming for financial recovery.

Conclusion

Managing tax liabilities during bankruptcy in Colorado involves understanding the specific bankruptcy chapter chosen and being aware of your rights and obligations to the IRS. Taking proactive steps and seeking expert guidance can help pave the way to financial stability and a fresh start.