The fear of going bankrupt has been deeply embedded in our minds since our early days of playing Monopoly. Was there any feeling worse than declaring bankruptcy and being forced to hand over all your money and mortgaged properties to your smug younger brother?
In the real world, though, bankruptcy isn’t necessarily the end. Sometimes, declaring bankruptcy is the best thing for a small business that is underwater and needs to get some financial relief.
When you file for chapter 7 or chapter 11 bankruptcy as an entity, some of your IRS tax debt can be wiped clean. When you declare bankruptcy, an automatic stay gets put into place that stops creditors, including the IRS, from collecting on your debt payments, providing some relief, at least temporarily. However, you won’t be entirely out of the woods.
Here’s what you need to know about how bankruptcy impacts the tax debt you owe to the IRS.
Bankruptcy and Tax Levies
If you owe money to the IRS, they may have applied a tax levy to your property. This means that the IRS has full financial ownership over your asset until you pay your tax debt in full. You can contact the IRS to request a levy release, which can happen if the IRS determines that releasing the levy will help you pay your debt.
See this related article and video on How to Eliminate Taxes in Bankruptcy.
If you are unable to make payments and decide to declare bankruptcy, then the IRS can release your levy within 24 hours.
Another type of levy is a wage levy, also called wage garnishment. This is when the IRS takes money directly from your paycheck to go toward your tax debt. Declaring bankruptcy will automatically stop wage levy payments, although you might still need to make payments for child support.
Help! How Can I Un-Freeze My Bank Account?
A final levy that might be applied is an IRS bank levy. This is when the IRS places a hold or freeze on your bank account so that they can collect all the money in there to pay your taxes.
Once your account is frozen, you only have 21 days before the bank turns all of your money over to the IRS. You can contact the IRS to see what options you have to make payments to them and get the IRS bank levy removed. If you can demonstrate that you are experiencing financial hardship, you may be able to work out an Offer in Compromise, which would result in a lower overall tax payment.
If you decide to declare bankruptcy, then the automatic stay that goes into effect after you declare bankruptcy will stop the IRS bank levy.
Get Help from Tax Law Experts
If you’re considering bankruptcy for your business, talk to a tax expert before finalizing anything. You might have other options that can help you get out of debt without resorting to bankruptcy. Contact us today for a free consultation to learn more about the options available for you and your business.