With tax season officially over, many Colorado residents are thankful they do not have to worry about paying taxes for another year. Others are not as fortunate, as their taxes have resulted in more personal debt. For these individuals, Chapter 7 bankruptcy may be an option to deal with these financial challenges.
Take, for example, the recent bankruptcy of rapper Young Buck, whose bankruptcy is almost complete. He decided to file for bankruptcy after incurring high tax debt.
The trustee overseeing Young Buck's case has indicated that most creditors will not be paid in full, including the Internal Revenue Service, which will be paid about 87 percent of a claim for $25,793. Other general unsecured creditors will not be paid at all, unless senior creditors are paid in full.
Generally, a debtor may still be liable for tax debt after bankruptcy. However, under certain circumstances, as in the case above, tax debt is allowed to be discharged through bankruptcy. This is more likely to occur in Chapter 7, as opposed to Chapter 13.
There are a number of factors that play into whether an individual can discharge tax debt, including what type of debt it is, how old it is and if the person filed a tax return. If the individual meets these requirements, and did not commit tax fraud, the taxes may be able to be discharged.
Even if tax debt is not discharged, other debts will be discharged under bankruptcy, thereby allowing the individual more ability to pay remaining debts. Moreover, the IRS may enter into other arrangements, such as an installment agreement, or a compromise on settling some debt. Accordingly, it is essential to work with a qualified attorney to determine what options a person has for discharging tax debt.
Source: The Wall Street Journal, "Young Buck's bankruptcy rap sheet," Jacqueline Palank, May 9, 2013