Many debtors who are considering filing New York bankruptcy are often concerned about past taxes that they owe the government. But which government? Very few people owe anything other than federal income taxes and payroll taxes (or self-employment taxes for those who aren’t payroll employees). Some people, though, owe money to the state government, which raises more types of taxes than the federal government does, particularly income, real property, and occasionally sales taxes. Here’s a rundown of what New Yorkers can expect to happen to such taxes.
For state income taxes, the good news is that the rules are the same as for federal income taxes. Debtors who filed a non-fraudulent, timely tax return on a tax that was owed at least three years ago may be eligible for a discharge. Those who filed a late return can only have their income taxes discharged if the late return is at least two years old. Taxes that have been assessed in the 240 days before a bankruptcy petition is filed are not dischargeable.
For property taxes, the law works differently. When people don’t pay their property taxes in New York, the state files a tax warrant (a kind of lien) against the property in the county in which it is located. The lien is nondischargeable, and the state can take legal action to collect its revenue, e.g. by levy, income execution, and seizure and sale of property. Tax liens can be repaid in chapter 13 bankruptcy.
Finally, for the business owners who are supposed to collect state sales taxes and are now in bankruptcy, any uncollected sales taxes are also considered nondischargeable. Like property taxes, sales tax debts can be dealt with in chapter 13 rather than chapter 7.
For those who choose to file in chapter 13, all three taxes will be treated as priority taxes, which means they will be paid to the revenue authorities before any other creditors. Like federal tax debts, state tax debts in a chapter 13 proceeding do not accrue interest, and the automatic stay applies to the government as much as any other creditor. If tax debts cannot be paid in full over the course of a repayment plan, then the state authorities might be willing to reach an agreement, known as an “offer in compromise.”
Owing significant taxes to either the federal or state (or even local) government can make a bankruptcy significantly more complicated, making it worthwhile to hire an experienced New York bankruptcy lawyer.
For answers to more questions about taxes in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy lawyer Bruce Weiner for a free initial consultation.
