How Washington Bankruptcy Laws Address Unpaid Taxes

How Washington Bankruptcy Laws Address Unpaid Taxes

Washington State's bankruptcy laws provide a structured way for individuals and businesses to address financial difficulties, including unpaid taxes. Understanding how these laws work can help taxpayers navigate their options effectively.

When a person files for bankruptcy in Washington, the type of bankruptcy chosen can significantly impact the treatment of unpaid taxes. The most common forms are Chapter 7 and Chapter 13 bankruptcy. Each has distinct implications for tax debts.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, also known as liquidation bankruptcy, individuals may discharge a variety of unsecured debts. However, when it comes to unpaid taxes, certain criteria must be met for the debt to be discharged:

  • The tax debt must be income tax, not payroll taxes or fraudulent tax returns.
  • The tax return associated with the debt must have been due at least three years prior to the bankruptcy filing.
  • The tax return must have been filed at least two years before filing for bankruptcy.
  • The tax debt must be assessed by the IRS or state tax authority at least 240 days before filing bankruptcy.

If these conditions are met, individuals may be able to eliminate their income tax debts through Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, often referred to as a reorganization or repayment plan, allows individuals to keep their assets and pay off debts over a specified period, usually three to five years. Unpaid taxes can be included in this repayment plan:

  • Tax debts that fail to meet the discharge criteria for Chapter 7 can often be treated as priority debts in Chapter 13. This means taxpayers must pay them off during the plan, but they might negotiate to pay less than the full amount.
  • It’s also essential to note that penalties associated with unpaid taxes may be dischargeable in Chapter 13 bankruptcy.

One of the advantages of choosing Chapter 13 is that it stops collection actions from the IRS or state tax authorities while the repayment plan is active. Additionally, individuals can negotiate the plan terms to make the process more manageable.

Tax Liens and Bankruptcy

Tax liens present unique challenges in bankruptcy. A tax lien does not disappear through bankruptcy proceedings. Instead, if a person's debts are discharged, the lien may remain attached to the property. However, in a Chapter 13 bankruptcy, it's possible to negotiate and resolve the lien through the repayment plan.

Consulting a Professional

Given the complexity of tax debts and bankruptcy laws, it is advisable to consult with a bankruptcy attorney who understands both federal and Washington State laws. Legal advice is crucial to determine the best course of action based on individual financial circumstances.

Conclusion

Washington bankruptcy laws offer viable solutions for addressing unpaid taxes, whether through discharge in Chapter 7 or repayment plans in Chapter 13. By understanding the intricacies of these laws and seeking expert guidance, individuals can regain financial stability and move towards a healthier economic future.