How IRS Collectors Can Be Ceased By Bankruptcy

Numerous people fall on financial hard times, regardless of the reasons. The IRS may feel that they also should be paid for tax debts, increasing the amount owed to creditors. And unlike other bill collectors, the IRS can be quite ruthless in their efforts. The IRS can definitely ruin a taxpayer's life if they wish to continue certain collection actions. Making available a bit of protection against the IRS's worst debt collection techniques is filing for bankruptcy.

Bankruptcy isn't an easy way out of debts, contrary to common belief. It's a method to let people seek relief from debts legally, including tax debts. Filing for Chapter 7 bankruptcy makes it possible for all debts, including tax debts (though without guarantee), to be cancelled. Filing for Chapter 11, 12, or 13 bankruptcy provides people an opportunity to settle their IRS problems by agreeing into an installment deal.

Filing for bankruptcy legally protects you from all actions made by the IRS and other creditors against you with an 'automatic stay'. The only way for the automatic stay to be lifted is when creditors appeal to the bankruptcy court. But this happens very rarely. For an automatic stay to be lifted, the IRS and other creditors should be able to give proof of fraud in the bankruptcy claim. A more serious IRS problem is likely if fraud is uncovered.

Tax debts are simply frozen until the bankruptcy claim is dismissed or discharged. The statute of limitations continues when bankruptcy is dismissed, definitely prolonging it.

A Chapter 7 bankruptcy has the potential to clear all tax debts definitely when specific requirements such as the 3-year rule are satisfied. The three-year rule basically says that all tax debts considered are at least three years old from April 15 of the year it was filed. Also included in the rule are extensions.

The 2-year rule is the second rule. The tax return must have been filed 2 years before the bankruptcy. Another rule is the 240-day rule. The IRS have to assess the taxes at least 240 days before filing for bankruptcy in this one.

However, even if a Chapter 7 bankruptcy is filed, loopholes still enable the IRS to collect. If the IRS filed a tax lien before the bankruptcy was filed, then, even after filing, the IRS still has first right to any property that the taxpayer held at the time of filing for bankruptcy. The main advantage of Chapter 11, 12, and 13 bankruptcies being re-organization bankruptcies is to allow the taxpayer to buy time to settle their IRS problem.