When considering bankruptcy, it’s crucial to understand how different types of debt are treated, particularly tax liabilities and student loans. Here’s what you need to know:
Taxes & Student Loans
Tax Debt in Bankruptcy
- Dischargeable Tax Debt: Certain federal and state tax debts can be discharged in bankruptcy, but specific criteria must be met. Generally, the tax must be:
- At least three years old (due date of the tax return).
- Filed for at least two years prior to your bankruptcy filing.
- Assessable by the IRS for at least 240 days before the bankruptcy petition.
- Non-Dischargeable Tax Debt: Some tax obligations, such as property taxes or fraud penalties, are typically non-dischargeable. Understanding the nature of your tax debt is essential in determining your options.
Student Loans and Bankruptcy
Generally Non-Dischargeable: In most cases, student loans cannot be discharged through bankruptcy. This includes loans from both federal and private sources. However, there are exceptions under certain circumstances.
- Undue Hardship Test: To discharge student loans, you must prove “undue hardship” through an adversary proceeding in bankruptcy court. This usually requires demonstrating that:
- You cannot maintain a minimal standard of living if forced to repay the loans.
- The hardship is likely to persist for a significant portion of the repayment period.
- You have made good faith efforts to repay the loans.
- Consulting an Attorney: Given the complexities involved in discharging student loans, it’s crucial to work with an experienced bankruptcy attorney who can help assess your situation and navigate the legal requirements.
- Bottom line: It is nearly impossible to have student loans discharged in bankruptcy in the State of North Carolina (your results may vary if you file your case in another state). As such, we cannot represent you in matters involving the discharge of student loans. You are free to engage independent counsel to represent you regarding student loan discharge issues, via an Adversary Proceeding, if you choose to do so.
Implications of Filing for Bankruptcy
- Impact on Credit: Filing for bankruptcy may have a brief negative effect on your credit score and can remain on your credit report for up to 7 to 10 years. However, it may provide relief from overwhelming debt and allow you to start rebuilding your finances and credit score sooner than you might expect.
- Automatic Stay: When you file for bankruptcy, an automatic stay is put in place, halting most collection actions. This can provide immediate relief from creditor harassment, including efforts to collect on tax debts.
Consider Alternatives
Before filing for bankruptcy, explore alternatives for dealing with tax and student loan debt, such as:
- Tax Negotiation: Engage with the IRS or state tax authorities to negotiate a payment plan or settle for less than owed (Offer in Compromise). Consult your CPA or tax expert regarding tax issues. The IRS does not allow us to give tax advice.
- Income-Driven Repayment Plans: For federal student loans, consider enrolling in an income-driven repayment plan (IDR) that adjusts your monthly payments based on your income. See www.StudentAid.gov for more information.
Conclusion
While bankruptcy can offer relief from many types of debt, it’s essential to understand the issues regarding tax and student loans. At Vujovic Law, we can help you navigate these complexities and recommend the best course of action for your financial situation. If you have questions about your debt and bankruptcy options, reach out to us for a consultation. Your financial well-being is our priority!