Arizona residents who are considering filing for bankruptcy may not be aware that their state offers a very comprehensive list of the bankruptcy exemptions that are available. In addition to wiping out most bills while retaining possession of the residential home, car and household items up to a certain monetary value, debtors may also be aware that their taxes can also be wiped out when they file for bankruptcy. But exactly which taxes are wiped out by declaring bankruptcy? It is very important to be aware of the facts before making important financial decisions.
Personal income taxes are generally dischargeable during bankruptcy and must be at least three years old from the tax return's due date. And more importantly, the tax must have been assessed for at least 240 days before it can be considered. The taxpayer must have filed the tax return personally; it cannot be a substitute filed by the IRS itself. When a taxpayer neglects to file their tax return, tax cannot be discharged through bankruptcy.
When considering filing for bankruptcy it is also important to know how debts are divided. Though most forms on unsecured debt are discharged, priority debts are not generally discharged. Student loans and child support are examples of priority debts. However, filing for Chapter 13 bankruptcy, where the debtor pays off their debts based on their income in affordable payments, may ease the financial burden of these priority debts by giving the debtor more time to pay them off. Deciding when to declare bankruptcy and selecting the bankruptcy option that is best suited for a Arizona resident's individual circumstances are important decisions that affect a filer's financial future.
Source: Fox Business, "How bankruptcy impacts your taxes," Bonnie Lee, July 25, 2013
