Tax debts are a very common reason for bankruptcy. Sometimes they just sneak up on you. Things are going well in business and you intend to put together the money required to cover you tax obligations a few months later, but something happens that affects your ability to earn money form your business. If you have some personal assets that you are able to sell in order to cover your debt obligations to the tax office – this strategy is worth considering. If not, then perhaps you are able to borrow the money required.
You have undoubtedly heard the old saying about ….”death and taxes”..and it remains true today. Your tax obligations is something that is very difficult to negotiate or avoid. At best the tax office may agree to give you some extra time to repay the debt, and at worst they may push you into bankruptcy.
What does bankruptcy do to tax debts?
Any tax obligations that you are aware of at the time that you go into bankruptcy are treated the same as any other provable debts and are included in your bankruptcy. Any tax obligations that may arise after you declare bankruptcy are new obligations and will not form a part of your provable debts.
What happens to tax accrued for year in which you declare bankruptcy?
Any tax that is applicable to income earned after you go into bankruptcy is not treated as part of provable debts and still needs to be paid. However tax that the tax office has not as yet assessed at the time that bankruptcy is entered can be included in the provable debts once a tax assessment is made by the tax office.
Tax refunds while in bankruptcy
You should be aware than any tax refunds received while in bankruptcy that may be due to you from previous tax years can and will be collected by the tax office to offset your debts to them. If your debts to the tax office have been settled in full but you remain in bankruptcy because of your other unpaid debts, the bankruptcy trustee has the power to collect such tax refunds and apply them towards your outstanding debt obligations.
What will happen to my Centrelink debt?
Most Centrelink debts form a part of provable debts in your bankruptcy proceedings and are wiped out as part of bankruptcy. The only exception to this is where your debt has occurred as a result of Centrelink fraud. In these circumstances your debt remains and does not form a part of bankruptcy provable debts. However not all over-payments of Centrelink benefits occur due to fraud. While Centrelink staff are left to decide whether a debt is caused by your fraud or an honest mistake, sometimes their determination is incorrect and can be questioned and reversed. There are some legal precedents that support this.