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Bankruptcy and your taxes

Many Arizona residents may have heard that filing for bankruptcy is one way that most bills and even some taxes are wiped out. But before they consider filing for bankruptcy because of back taxes it is important to know what, exactly, this statement means.

Yes, bankruptcy is a way to ease the debt burden many people across the country are facing, but not all taxes and not all bills are discharged during the process. Items that are considered priority debts are not discharged during bankruptcy proceedings. These include student loans, child support payments and priority tax debts, as well as a few other items. In a Chapter 13 bankruptcy reorganization, priority debts must be paid in full.

So then, which debts are discharged during bankruptcy? Personal income taxes that are at least three years old from the tax return's due date, including extensions. For this tax return to be considered, it must have been filed by the taxpayer him or herself and the tax must have been assessed at least 240 days prior. If the tax return has not been filed, then regardless of how old the liability is, the taxes cannot be discharged through bankruptcy.

Therefore, though personal bankruptcy, both Chapter 7 or 13, is one way to deal with debt, it is important to understand what types of debt are dealt with and how they are being dealt with. Many people consider filing for bankruptcy in order to ease their financial burdens, but if the burden is not being discharged then they cannot reap the full benefits of bankruptcy. An experienced attorney may be able to guide overwhelmed Arizona residents through the process to see if they can get the full benefit of filing for bankruptcy.

Source: Fox Business, "How Bankruptcy impacts your taxes," Bonnie Lee, July 25, 2013