Clearing Tax Debt In Bankruptcy In Nevada

It is often said that the two things no one can avoid in this life are death and taxes. But Nevada residents are lucky enough not to be liable for state income taxes. Still, it’s possible for a Nevada resident to accrue federal tax debt, business tax debt, or have tax debt remaining from other states. And it’s common for one type of debt, such as tax debt, to be accompanied by a myriad of other debts, as financial issues aren’t experienced in a vacuum. When debt payments become too much to juggle with regular monthly expenses, it can lead to a chapter 7 or chapter 13 bankruptcy filing. Both of these are powerful forms of debt relief with immense benefits for those who file. But taxes can be one of the more complicated debts to discharge in bankruptcy, because they can be categorized as priority or unsecured non-priority debts. If you are considering filing for bankruptcy in Nevada and tax debts are one of your concerns, it’s important to educate yourself about what will happen to these liabilities in your bankruptcy case. To discuss your situation with an experienced Las Vegas bankruptcy lawyer free of charge, call 702-370-0155. 

The 3-2-240 Rule

The first step to determining if bankruptcy is the right solution for your tax debt problems is by applying the 3-2-240 rule to see if your taxes are priority or unsecured. When federal tax debts meet the following criteria, they are considered unsecured debts, which are easier to clear in bankruptcy:

• The taxes were due at least 3 years before the bankruptcy petition was filed
• The tax return was filed at least 2 years before the bankruptcy petition was filed
• The IRS must have assessed the tax debt at least 240 days before the bankruptcy petition was filed. This clock stops running when there is an Offer in Compromise pending 
• No bankruptcy fraud indicated in the return

When taxes meet the requirements listed above, they are unsecured, so they are treated like credit cards, medical bills, etc., in bankruptcy. These debts are cleared across the board in a chapter 7 bankruptcy case. In chapter 13 bankruptcy, the debtor only pays these debts to the extent that they can afford after paying off secured and priority debts within a certain time frame. And even if tax debt meets the 3-2-240 guidelines, it will be non-dischargeable in bankruptcy if it came from a fraudulent tax return or willful tax evasion. 

Nevada Business Taxes

Nevada has no state income tax, which is a huge boon to our residents, many of whom have variable incomes. But things are slightly different for those who run their own businesses. Nevada business taxes do not fall under the 3-2-240 rule and receive different treatment in bankruptcy. Examples of tax debts here include sales and use taxes, payroll taxes, and commerce taxes. Instead of being treated like a non-priority tax debt, they are treated like trust fund and excise taxes in bankruptcy in Nevada. They can’t be cleared in a bankruptcy filing. However, a debtor may utilize chapter 13 to put those tax debts into a payment plan. They are the third category of debts paid off in a chapter 13 plan, which you can find more information about below. 

Chapter 13 Bankruptcy Payment Plans

If you have non-dischargeable tax debt, filing for chapter 7 bankruptcy can only clear other debts to pave the way to paying off back taxes. Chapter 13 bankruptcy won’t clear them either, but they will be included in the debtor’s payment plan, which is specifically tailored to their budget. Chapter 13 payment plans always last either 3 or 5 years. Which term applies is based on how the debtor’s household income compares to Nevada’s state median household income. The debtor should include their spouse and any minor children when conducting their household income comparison. 

After determining how long the payment plan will be, the next step is to calculate the monthly payments. The debtor should complete the means test to find their disposable monthly income. The costs associated with filing for bankruptcy are the first to be paid in a chapter 13 plan. Next, secured debts must be paid in full. The next category of debts that must be repaid in chapter 13 bankruptcy is priority debt, which some back taxes will fall under. The fourth and final category of debt paid off in chapter 13 bankruptcy is unsecured debt, which includes older tax debts as described above. If the debtor only has exactly enough disposable income to pay off the first three categories of debts within the 3 or 5 years their payment plan lasts, unsecured debts will be discharged. But this is difficult to achieve with precision, and most chapter 13 debtors will receive a partial discharge of their unsecured debts. 

Tax Liens

It’s important to address priority debt, such as tax debt to the IRS, with urgency. Otherwise, there could be consequences that reduce the effectiveness of a bankruptcy filing. The IRS can place a lien on a tax debtor’s property before filing for bankruptcy, which secures the debt to the asset. The debtor can’t sell or transfer the property without addressing the lien, which can’t be cleared by a bankruptcy filing. Filing for bankruptcy will clear the personal liability and make it so the IRS can’t garnish wages to pursue back taxes. But the lien will remain once the IRS files a Notice of Federal Tax Lien. The debtor should be provided official notice of this filing so they have a chance to explore their options. But once that lien is in place, bankruptcy can no longer clear the debt, even if it meets the 3-2-240 rule. It can only be paid off in a well-formulated chapter 13 bankruptcy plan, if the debtor can qualify. If you believe your tax debts could soon progress to the lien phase, you could benefit from chapter 7 or chapter 13 bankruptcy, and possibly require an emergency filing. Speak to a member of our firm as soon as possible with your free phone consultation at 702-370-0155 for more information. 

Don’t Enter Bankruptcy with Unanswered Questions About Tax Debts. Schedule Your Risk-Free Phone Consultation Today. 

Filing for bankruptcy can be intimidating, and assumptions about the affordability of retaining a lawyer lead many debtors to file their petitions self-represented. On the surface, this can save dollars, but the costs this can cause can be much more expensive and pervasive. Some pro se debtors will have some of their debts excluded from their bankruptcy discharge, have assets taken by the trustee and sold to pay debts, and more. This might end up costing the debtor more than it was worth to file for bankruptcy in the first place. If you could file for bankruptcy with zero dollars down, paying in monthly installments after expenses like interest and wage garnishments have been cleared, would you be less reluctant to speak with a bankruptcy attorney about your situation? Our Las Vegas bankruptcy lawyers offer free consultations by phone with no risk or obligation. Call our office at 702-370-0155 or visit our website.