Tax debt is one of the few forms of debt that is not always easily erased in a consumer bankruptcy case. While it is true that discharging tax debt can be difficult in a bankruptcy case, it is not impossible. Ultimately, it depends on the type of bankruptcy being pursued and the type of debt involved as to how it is handled.
While a bankruptcy filing normally puts an immediate halt to all collection actions on debt through the automatic stay, tax debt is treated differently.
By the time an individual reaches the point of filing for bankruptcy, he or she is likely inundated with all types of consumer debt, ranging from medical debt to credit card debt and possibly, tax debt. While a consumer bankruptcy case will eliminate a large portion of this debt, tax debt is not normally included in this list.
Taxes fall into the category of “non-dischargeable priority debt,” which means that the bankruptcy case will not eliminate them. Additionally, repayment of these claims is given priority over other creditors’ claims. However, circumstances do exist where tax debt can be discharged with a bankruptcy filing, but certain requirements must exist before that can happen.
With tax season coming to an end, many consumers are wondering how they are going to pay their outstanding tax bill. When it comes to tax debt, it is best to pay it off as quickly as possible and in one lump sum payment. However, payment in full is not always possible. Fortunately, there are options available for those struggling with tax debt.
The official tax filing deadline was May 17, and all outstanding 2020 tax bills were technically due at that time. If a taxpayer was not able to pay the bill by this date, interest and penalties will begin accruing on the outstanding amount owed. The penalty for not paying tax bills in full is 0.5 percent of the unpaid amount monthly until the full amount is paid. On top of interest, penalties will add up to 25 percent of the total amount owed. Because of these penalties, the quicker the tax bill can be paid, the better.
