After experiencing continued financial struggles, some Connecticut residents and others around the nation make the decision to file for bankruptcy to get a fresh start. One option when filing for bankruptcy is Chapter 7. This type of filing is also commonly know as liquidation bankruptcy, since certain assets are sold and the proceeds are used to pay one’s creditors. There are very specific guidelines regarding which debts can be discharged. Yet, how should unpaid income taxes be handled in this type of bankruptcy filing?

A person had not filed income tax returns for three years and was hoping to avoid paying those taxes since Chapter 7 protection was being sought. In general, when certain debts are discharged, the consumer does not have to pay the creditor back after the bankruptcy is complete. However, individuals must pay back those debts that are deemed as non-dischargeable. Within specific time frames, taxes are normally not discharged. Yet, if several rules are met, some income tax debt can be discharged.

Some of the rules state that a return may not be fraudulent nor the filer be guilty of tax evasion. Also, the tax return due date should be over three years ago. If an agreement is reached to discharge the taxes, the amount forgiven is generally included in a taxpayer’s gross income.

A Connecticut attorney can help clients navigate through the process of determining whether a Chapter 7 bankruptcy is the best solution for them. A knowledgeable attorney can also help sort through the complex tax implications following a bankruptcy filing. It can be reassuring to know there is guidance available to help get one’s finances back on track.