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Tax Issues: Which Chapter of Bankruptcy to Choose

Law Office of Jason Cline May 12, 2022

Filing for bankruptcy is not a decision to be taken lightly. Those seeking debt relief have likely already looked at all their options and came to the difficult conclusion that bankruptcy is the only viable choice. However, there are still many questions to be answered and an experienced bankruptcy attorney can help. 

Petition for Bankruptcy FormIf you’re curious about your options for filing and want to learn more, call me at the Law Office of Jason Cline to schedule a consultation. My office is in Albuquerque, New Mexico, but I’m able to serve clients throughout the state, including Rio Rancho, Santa Fe, and Los Lunas.

Chapters of Bankruptcy

There are three main types of bankruptcy to choose from. Some are better for individuals while others are better for businesses, and they all come with their own benefits and drawbacks.

Chapter 7 Bankruptcy: Chapter 7 is the fastest and simplest form of bankruptcy. It’s often referred to as “liquidation” bankruptcy because an individual must liquidate (sell-off) their assets to pay their creditors. After this is complete, the remaining dischargeable debt will be wiped out. This is a good option for individuals who don’t have a lot of assets and who can’t reasonably pay back their debts in five years. In most cases, you can keep primary assets like your home, vehicle, and furnishings.

Chapter 13 Bankruptcy: Chapter 13 can be used by both individuals and businesses. It allows you to keep your assets while consolidating your debts into one court-ordered repayment plan. This plan must be followed for three to five years at the end of which time your remaining dischargeable debt will be erased. This option is ideal for those with many assets they don’t want to lose and for those with a high enough income to cover basic expenses as well as their payments to creditors. 

Chapter 11 Bankruptcy: Chapter 11, commonly called “reorganization” bankruptcy, is the most complex and expensive method and is reserved for businesses. This method allows businesses to stay operational while they are repaying their creditors; however, many decisions they make during this time must be approved by the court.

Tax Issues During a Bankruptcy Case

One common concern for anyone considering bankruptcy is the tax implications of filing. Not all debts can be discharged when you file, and tax debts are among these. This means that you will still be subject to most state and federal taxes after the bankruptcy period, although some may be dischargeable. Once you file, there will be an automatic stay issued for all your creditors (government included), but after the process is complete, the tax issue will not simply go away. 

With a Chapter 7 filing, this generally means you will still owe the same amount after the process is complete, but hopefully, you’ve freed up enough of your disposable income to cover it. With Chapter 13, you may be able to include tax debt into your installment plan. Tax concerns for Chapter 11 filing can be complicated, including different requirements for taxes incurred pre-petition or post-petition and how tax refunds may be impacted during your repayment period. For all types of filing, it’s essential to consult with an attorney so you fully understand how this will affect you.

How an Attorney Can Help

Each individual has specific circumstances that must be considered before choosing a method of tax relief, and an experienced bankruptcy attorney can help you decide which type best meets your needs to discharge your debt. If you’re in the Albuquerque, New Mexico, area and would like to schedule an appointment to learn more about your bankruptcy options, call the Law Office of Jason Cline today.