On January 3, 2008, the Milwaukee Business Journal announced that Northwest Airlines is seeking to settle its $329 Million tax liability in the Bankruptcy Court for $12.6 Million (see story here: http://milwaukee.bizjournals.com/milwaukee/stories/2007/12/31/daily22.html ) For most taxpayers, individuals and businesses alike, these numbers are well beyond the tax liabilities that they will ever face. Yet, regardless of the size of a tax debt, any taxpayer seeking to resolve a liability through bankruptcy should be aware that the bankruptcy protections are limited when it comes to tax debts.
A Chapter 7 bankruptcy is the type that can be used by individuals to eliminate most debts and can include certain income taxes. The bankruptcy rules as applied to tax liabilities can be complicated but should be kept in mind. As a general guideline, in a Chapter 7 bankruptcy before income tax debts are dischargeable,
1) The tax returns must have been due at least three years before filing for bankruptcy,
A Chapter 7 bankruptcy is the type that can be used by individuals to eliminate most debts and can include certain income taxes. The bankruptcy rules as applied to tax liabilities can be complicated but should be kept in mind. As a general guideline, in a Chapter 7 bankruptcy before income tax debts are dischargeable,
1) The tax returns must have been due at least three years before filing for bankruptcy,
2) The returns must have been filed at least two years before filing for bankruptcy and
3) The taxes must have been “assessed” at least 240 days before filing for bankruptcy.
Some taxes can never be discharged in bankruptcy, including, payroll taxes, Trust Fund Recovery Penalty assessments (i.e. personal liability for employment taxes), and fraud penalties. Further, a person should be cautious as different rules may apply in Chapter 11, 12 or 13 bankruptcies.
Therefore, even if a person is contemplating bankruptcy, it may be necessary to address their tax liabilities separately, either during or after their bankruptcy proceeding. That is, if the tax debt is not old enough, or someone owes the wrong kind of tax, bankruptcy will not solve the tax problem.
Tax liens filed before the bankruptcy petition is filed will also remain in place following a discharge of the taxpayer’s debts. Such liens will need to be resolved or released before any property subject to the lien can be sold.
Some taxes can never be discharged in bankruptcy, including, payroll taxes, Trust Fund Recovery Penalty assessments (i.e. personal liability for employment taxes), and fraud penalties. Further, a person should be cautious as different rules may apply in Chapter 11, 12 or 13 bankruptcies.
Therefore, even if a person is contemplating bankruptcy, it may be necessary to address their tax liabilities separately, either during or after their bankruptcy proceeding. That is, if the tax debt is not old enough, or someone owes the wrong kind of tax, bankruptcy will not solve the tax problem.
Tax liens filed before the bankruptcy petition is filed will also remain in place following a discharge of the taxpayer’s debts. Such liens will need to be resolved or released before any property subject to the lien can be sold.
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