What Happens to Tax Debts During Bankruptcy in Minnesota?

When an individual or business in Minnesota files for bankruptcy, one pressing concern is what happens to existing tax debts. Bankruptcy can provide relief from overwhelming financial obligations, including taxes, but the treatment of tax debts varies depending on specific circumstances and the type of bankruptcy filed.

In Minnesota, individuals typically choose between Chapter 7 and Chapter 13 bankruptcy. The outcome for tax debts largely depends on the chapter filed and the nature of the tax obligation.

Chapter 7 Bankruptcy

Under Chapter 7 bankruptcy, most unsecured debts are discharged, allowing debtors a fresh financial start. However, not all tax debts qualify for discharge. Specifically, to be discharged, the following conditions must be met:

• The tax return was due at least three years prior to the bankruptcy filing.
• The tax return was filed at least two years before filing for bankruptcy.
• The tax debt must have been assessed by the IRS or state tax authorities at least 240 days prior to the bankruptcy filing.
• The tax return was not fraudulent and the debtor was not guilty of tax evasion.

Tax debts that meet these conditions can be discharged, relieving you of the obligation to pay them. However, debts that do not meet these criteria may remain and must be paid even after bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, also known as a wage earner's plan, allows individuals to restructure their debts and create a repayment plan over three to five years. This path is often more beneficial for tax debts, as it allows for the possibility of reducing the overall amount owed.

In Chapter 13, tax debts that are priority debts (such as recent tax obligations) must be paid in full during the repayment plan. On the other hand, older tax debts that are dischargeable can be included in the repayment plan, often reducing the amount to be paid back. The court will evaluate your total debt and income to determine a feasible repayment plan.

Ongoing Tax Obligations Post-Bankruptcy

It's important to note that tax debts that are not discharged will still be enforceable after bankruptcy. This means that if a debtor files for bankruptcy without addressing these obligations, they may continue to face collection actions from tax authorities post-bankruptcy. For this reason, individuals should consult with a tax professional or a bankruptcy attorney to understand how their specific tax situation will be affected by bankruptcy.

Conclusion

In summary, tax debts play a significant role in bankruptcy proceedings in Minnesota. Understanding the type of bankruptcy filed and the age and nature of the tax debts involved can clarify what obligations may remain after bankruptcy. Individuals facing tax debts should seek professional guidance to navigate their options effectively and optimize their financial recovery through bankruptcy.