Bankruptcy is the court-ordered protection of debtors who cannot pay their bills. Debtors in bankruptcy are protected by Automatic Stay which prevents creditors from taking certain actions to collect the money owed to them. View the federal statute (United States Courts, Chapter 11, section 362(a)). For joint individual income tax debts, the filing of bankruptcy of one of the liable debtors does not protect the other debtor. Both debtors must file bankruptcy to have the Automatic Stay protection.
The Automatic Stay can be modified for corporate, individual income and withholding taxes. Bankruptcy Local Rule 4001-1
allows taxing authorities the right to issue notices of tax delinquencies, assess taxes, issue refunds on tax returns and to offset
those refunds against assessed taxes.
The department will file a bankruptcy claim for payment of tax debts in certain bankruptcies. Other state agencies are responsible for filing claims for the other agency debts that may have been referred to the department.
Types of Bankruptcy
The most common types of bankruptcy are Chapter 7, Chapter 11, Chapter 12, and Chapter 13.
The table below lists each type , the duration and who is eligible. The duration of the bankruptcy and what entities are eligible for each type vary.
||Generally 90 days
||Businesses or individuals.|
Up to 6 years
|Businesses and individuals who do not meet requirements for Chapter 13.|
||Up to 5 years
||Individuals and businesses that get more than 50 percent of their income from farming.|
||Up to 5 years
||Individuals, married couples with sole proprietorships with regular income.|
When a bankruptcy case receives a discharge the account is reviewed by the department to determine if:
- Certain tax debts may no longer be collectible in part or their entirety.
- The SOL for collection of any debts not discharged is extended for the period of time the debtor was in bankruptcy.
- A debtor has acted dishonestly, failed to cooperate with the bankruptcy court or trustee, or has abused the bankruptcy laws. If so, the discharge may be denied or revoked.
There are circumstances under which the bankruptcy court determines the debtor should not receive a discharge, and the bankruptcy is dismissed. If so, the creditors are given the same collection rights as before the bankruptcy petition, and the SOL is extended by the length of time between the petition date and the dismissal date. No debts will be discharged if a bankruptcy case is dismissed.
Refunds can be applied to a tax debt while a debtor is in bankruptcy within certain guidelines. Refunds from returns with a pre-petition due date can apply to pre-petition debts, and refunds from returns with a post-petition due date can apply to post-petition debts.
Property tax refunds are not applied to any debt when a debtor is in bankruptcy.
Refunds from a spouse not in bankruptcy can apply to a joint liability. On joint liabilities where one of the spouses filed bankruptcy, the refund from the spouse not in bankruptcy can apply to the debts owed jointly with the debtor in bankruptcy.