Tax Debt Helps in Bankruptcy

Even if you have a significant amount of ‘consumer debt,’ as long as your ‘tax debt’ is more than your consumer debt, you may be able to avoid taking the means test, no matter what your monthly income. You may also still be able to file Chapter 7 bankruptcy despite earning more than the allowed median income.

Congress made significant changes to the bankruptcy code in 2005. The law changed making filing bankruptcy a lot more difficult for the consumer. Your income and the kind of debtor you are will determine if you have to take the ‘means test’ to see if you qualify to file bankruptcy. Contact an experienced bankruptcy attorney who can help you determine whether you should consider filing Chapter 7 or Chapter 13 bankruptcy.

The Means Test

You may be required to pass the ‘means test.’ This test is used to determine if you are poor enough to file bankruptcy. Passing the means test can be problematic if your household income registers above what New York considers median income. This test is an unfounded mathematical calculation that the state uses to determine just how destitute you truly are. If you are unable to pass this test, it disqualifies you from filing bankruptcy. If you have an unpaid tax debt, it can actually help you avoid taking the means test.

An Unpaid Tax Debt Could Assist You in Obtaining Bankruptcy Relief

You are a consumer debtor if the debts you owe are largely consumer debt. Consumer debt is any debt that you incur for your personal, household, or family use. You incur this type of debt voluntarily. Unlike consumer debt, tax debt is an obligation you incur by law. For this reason, tax debt is different than consumer debt. Therefore, if your tax debt totals more than your consumer debt, you can avoid taking the Means Test no matter how much your monthly income.

A good example of this principle is:

If you have ‘consumer debt’ and ‘credit card’ debt that totals $75,000 and a ‘tax debt’ of $75,001 you are not considered a consumer debtor. If your tax debt meets specific criteria, you can discharge it in your bankruptcy as well.

So, having more tax debt than consumer debt allows you to:

  • Avoid taking the means test.
  • Possibly eliminate your tax debt.

Understanding Chapter 7 and Chapter 13 Bankruptcy

The bankruptcy means test determines if your income allows you to file bankruptcy. It’s a formula designed to ensure that debtors with higher incomes do not file for Chapter 7 bankruptcy. A Chapter 7 bankruptcy allows you to eliminate all your debts.

If you do not pass the means test, you need to file a Chapter 13 bankruptcy. This form of bankruptcy requires that you pay back a portion of your debts.

You are not required to be impoverished to file Chapter 7 bankruptcy. Even if you earn a substantial amount of money each month, you can qualify to file Chapter 7 if you can show that you have numerous expenses.

If You Qualify to File Chapter 7 Bankruptcy

If you have a substantial amount of consumer debt on top of unpaid tax debt, chances are you feel overwhelmed.

Even so, you do not have to file Chapter 7 just because you meet the criteria to do so. Any decision you make concerning filing bankruptcy should be made after you consider all the factors involved in your debt and the alternatives available to you.

An experienced bankruptcy attorney can help you determine if Chapter 7 bankruptcy is the best solution for you. Contact our office to set up your initial consultation with an experienced bankruptcy attorney.

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