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How tax liabilities are treated in bankruptcy

Massachusetts debtors may gain some relief from their debts through the bankruptcy process. However, there are some types of debts such as tax liabilities that may be mostly nondischargeable. While tax liabilities might be discharged in some situations, the ability to do so is limited.

In general, tax debts must date to a return that was due at least three years before the bankruptcy petition was filed. The tax return with which the debt is associated must have been filed at least two years prior to the bankruptcy petition. The debt must have been assessed against the debtor at least 240 days before the filing of the petition.

Tax debts that are associated with frivolous or fraudulent tax returns are not dischargeable. They also cannot be related to tax evasion. In most cases, people are not able to discharge tax debts that arise from returns that they failed to file. They also cannot be from late tax returns that were filed within two years of when people filed for bankruptcy. Finally, people cannot discharge withholding taxes for which they are responsible.

People who have questions about how their tax liabilities might be handled during their bankruptcy cases might want to talk to bankruptcy law attorneys. The lawyers may evaluate whether or not the tax debts might be dischargeable. If they are, the attorneys may then seek to have them discharged in bankruptcy. If the tax debts are not dischargeable in Chapter 7, the attorneys might recommend that people consider filing for Chapter 13 protection instead. This is a type of debt reorganization bankruptcy. Choosing Chapter 13 might give people longer periods of time to repay their tax liabilities while paying a small percentage of their other unsecured debts. If they successfully complete their repayment plans, the other unsecured balances may be discharged.

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