Do I Have to Pay California Taxes If I File Bankruptcy?
Bankruptcy allows people who have lived in California for at least six months to request partial or complete forgiveness of consumer debts. But this doesn't necessarily include tax liability. Senate Bill 256, signed into law in 2005, makes it much harder to include California state, local and federal taxes in bankruptcy.
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Applicable Time Frames
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Any California tax bills that are over three years old at the time you file bankruptcy can be included in your case, notes the book "How to File for Chapter 7 Bankruptcy." But the three-year time frame begins with the date you filed taxes and not the tax year itself. Thus, if you filed a state tax return due in 2008 in 2009 you can't include resulting tax liability in your bankruptcy case until 2012. The three-year time window also applies to funds owed to the Internal Revenue Service or local governments.
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Additional Tax Basics
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A judge can dismiss your bankruptcy case if you haven't filed your last four state and federal tax returns, warns the United States Bankruptcy Court Northern District of California. This rule applies whether you've elected to request debt forgiveness under Chapter 7 or debt reduction under Chapter 13. Also, if you don't pay your recent tax bills the taxation authority to which you owe funds can legally issue tax liens against you regardless of your bankruptcy status.
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Future Tax Refunds
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If you file a California Chapter 7 case and are owed a tax refund before your case is finalized, you usually must relinquish it for the benefit of your creditors. But once your Chapter 7 case is finalized, your future tax refunds are yours to keep. In a Chapter 13 case, a California bankruptcy judge can require you to use part or all of your next three to five tax refunds toward creditor repayment. Once you finish repaying your Chapter 13 plan, your tax refunds belong to you to do with as you wish.
Other Ineligible Debts
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Senate Bill 256 also limits your ability to include other forms of "priority" debt in any type of bankruptcy case. This bankruptcy reform bill forbids anyone from including child support, alimony, court fines or civil damages owed due to criminal activities. Senate Bill 256 also bans debtors from including debts incurred right before bankruptcy or future debts. Also, don't count on including federally issued student loans in your case unless a California bankruptcy judge approves a rare exception. Accepted circumstances include a serious and permanent disability, the college going out of business or allowing you to attend classes without a high school equivalency diploma or an academic placement test.
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