Bankruptcy can be quite complicated. In a nutshell, bankruptcy is a process wherein those with debt problems can discharge such debt, meaning that it is forgiven and the debtor does not owe any money to the government.
Things can get a bit more complicated regarding bankruptcy in Massachusetts when considering what taxes can and cannot be discharged.
Generally, there are several kinds of taxes that can be discharged, including income taxes, property taxes, sales and use taxes, and excise taxes. Here is an overview of these taxes, whether they can be discharged, and the parameters of the discharges. First, there are two major types of bankruptcy discharges, Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, all debt is eliminated; the debtor is relieved of all debt responsibility. This gives debtors a “new beginning,” allowing them to wipe the slate clean. A typical candidate for a Chapter 7 bankruptcy has a large amount of credit card debt, few assets, and other unsecured bills, such as utility bills. The debtor may keep some secured debt, such as a house (secured by collateral—in this case, a mortgage), provided that they sign a voluntary “Reaffirmation Agreement,” and the debtor still owes that debt and must continue to pay it.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is different. In this arrangement, the debtor must propose a repayment plan, usually three to five years, to creditors where they offer to pay off all or part of their debt. Debtors use this arrangement to pay back debt such as missed mortgage payments, pay back taxes, and prevent interest from accruing on tax debt. The amount to be repaid is contingent on the debtor’s income. Basically, this type of bankruptcy is best for those who want to maintain their secured assets, including their homes and cars.
Taxes are dischargeable using Chapter 7 to completely wipe away the debt, or by using the “on time” method that Chapter 13 offers debtors.
Other Information You Need to Know
While sales and use tax, property tax, and excise taxes may be discharged, income tax the most common type of tax debt that people petition to discharge. They are not usually recent income taxes; they are often from returns due years before. There are several stipulations, including that the returns to be discharged are at least three years old. Also, the debtor must not have committed any willful tax evasion or fraud, must have actually filed the tax return for the year it was due, and they must pass the “240 day rule,” meaning that either the tax debt the debtor wants to discharge must have been assessed by the IRS at least 240 days before the bankruptcy was filed, or the tax return for the debt has not yet been assessed by the IRS.
Several debts cannot be discharged in Massachusetts. These include rent income tax debts with the past three years, fines and penalties for breaking the law, such as traffic tickets; most student loans, personal injury or DWI-related (driving while intoxicated) deaths, and family obligation-type debts, such as back child support.