Bankruptcy is a tool designed to help those in serious financial trouble get a fresh start. Bankruptcy protection can eliminate many debts permanently, but there are a few types of debt that may not be easy to erase. Student loans and taxes may be difficult to eliminate in bankruptcy, but it is possible to do so in some cases.
Discharged Debts
When you file for chapter 7 bankruptcy, you get to benefit from the liquidation form of bankruptcy. The bankruptcy court eliminates or forgives most of your debts. Some debts are easily discharged such as credit card debt or auto loans, but student loans or a federal tax debt could remain.
Student Loan Discharge
To get your student loans discharged, you will have to prove that paying them creates an undue hardship on you. You have to file a special motion with the court to have this considered. You then have to meet with the judge privately and discuss your financial hardship. Paying back these loans has to create a large amount of financial stress for you. Typically, you have to be disabled or be prevented from working in some other way before the judge will consider this.
Tax Discharge
Getting taxes discharged in bankruptcy is not always possible. If the Internal Revenue Service has already placed a lien on your property, you will not be able to get out of paying the taxes. If the tax debt is unsecured, you could potentially get the taxes discharged. To get tax debt discharged, it has to be on non-priority taxes. This means that the taxes have to be from a tax return that was not filed in the last three years.
Offer in Compromise
You can also work with the IRS to try to get an offer-in-compromise accepted. This is a program that the IRS offers that allows some people to pay less than they owe in taxes. With this option, you may be able to pay less than what you owe but not get the entire amount of your taxes forgiven. You will have to prove that collecting the tax imposes a serious financial hardship on you to qualify for this program.
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