You have may have wondered what the advantages and disadvantages are in regard to filing for Chapter 7 bankruptcy and how it affects collection from the IRS. Below is a list of both the benefits and the detriments that are involved after filing for Chapter 7 bankruptcy.
IRS Benefits under Chapter 7 Bankruptcy
1. After filing for Chapter 7 bankruptcy there will be an automatic stay on all collection activities which stops the IRS from pursing any type of collection efforts against a taxpayer.
2. Chapter 7 bankruptcy is relatively cheap and inexpensive.
3. The debtor is relieved of all their dischargeable debt with no requirement of post-filing payments through a plan which are usually required with Chapter 11 and Chapter 13 bankruptcy.
4. The taxpayer will be given the ability to retain exempt and excluded assets. Which state the taxpayer lives in will determine which exemptions apply. Some states allow IRAs to be exempt under the bankruptcy code. Other exemptions include homestead and motor vehicle.
IRS Detriments under Chapter 7 Bankruptcy
1. The taxpayer may be forced to lose their nonexempt assets.
2. The taxpayer will not be able to obtain a subsequent Chapter 7 discharge for eight years.
3. Any creditors that are holding non-discharged debt, including any taxing authority, will be able to pursue collection of the debt once the automatic stay has been lifted.
4. Detailed financial disclosure is required and may be more than you are willing to show.
5. The filing of a bankruptcy petition suspends the statute of limitations in regard to collection of non-discharged federal tax liabilities for the period during which the IRS is prohibited from collecting the debt, plus six months.
As you can see this list is rather long and must be weighed carefully when choosing whether to file for Chapter 7 bankruptcy. If you are unsure as to whether to pros outweigh the cons, it may be beneficial for you to see professional help in make a decision.