Many people file for bankruptcy think that their tax debt is dischargeable. In some cases it is dischargeable and in other cases it is not. Income taxes that are owed to the IRS that are 3 years or older, filed on time, and had no amendments to them, are eligible for discharge. Income tax debt that is younger than 3 tax years is not dischargeable in your bankruptcy.
Unsecured income tax debt however may be included in a Chapter 13 bankruptcy payment plan and dischargeable. If the IRS or your state revenue authority have not recorded a lien and it is not considered unsecured (for failure to meet certain criteria), then it will be considered a priority debt. The state and/or the federal government would be considered priority creditors and will be amongst the first to be paid off during your payment plan.
Income Tax Liability in Short Sales
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If you are considering a short sale or are in the process of a short sale, you may be liable for taxes on any deficiency left after the short sale has been accomplished. If you are considering filing for Bankruptcy, attempting a short sale beforehand is not recommended. Short sales and deeds in lieu of foreclosure provide certain benefits to the credit of those that choose to do them versus going through the process of a foreclosure. Lenders report short sales and foreclosures much differently on credit reports. For example, FICO scores with a reported foreclosure are generally fall 50-130 points lower than those with reported short sales. However; if you file for bankruptcy this would void any of the benefit that you would have received from the short sale. So if you are considering a short sale for purpose of the benefits to your credit, but are also considering bankruptcy, it is recommended that you do not proceed with the short sale.
For more information, visit Smith Legal Services, LLC. At www.mysmithlegal.com, or contact us at 240-245-0015.
