Bankruptcy allows individuals and businesses in financial distress to obtain relief from their debts. “Financial distress,” in this context, typically refers to situations in which one’s income is not enough to continue making required debt payments. The “relief” offered by bankruptcy may involve a discharge of debt after a period of making payments or liquidating assets. Not all debts, however, are eligible for discharge. Discharge of tax debt in bankruptcy is particularly tricky. It depends on the type of taxes owed, and the circumstances in which the debtor accrued the tax debt.
A bankruptcy case is often a difficult process for debtors. This is largely by design. Federal bankruptcy law requires debtors seeking relief to undergo an extensive process of accounting for all of their assets and debts. A court-appointed trustee oversees the debtor’s property, known as the “bankruptcy estate” while the case is pending. The trustee notifies the creditors and holds a meeting to allow them to present their claims. The debtor has to abide by payment schedules created by the trustee.
Three chapters of the Bankruptcy Code form the most common types of bankruptcy cases. Chapter 7 allows for discharge of debts after liquidation of assets. Chapter 11 involves a restructuring of debts and debt payments. Chapter 13 establishes a plan for payment of debts, followed by a discharge of remaining debts. Individuals and families usually file for bankruptcy under either Chapter 7 or 13. Businesses can file under Chapter 7 or 11, but they can only obtain a discharge of debts under Chapter 11.