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Monday, August 15, 2011
Chapter 7 Bankruptcy, Taxes, and the IRS: The Automatic Stay
As soon as you file your Chapter 7 bankruptcy, you are protected by the bankruptcy “automatic stay.” This stay is one of the most powerful tools in bankruptcy. It has the same effect as a federal injunction issued against all of your creditors – including the IRS. They must stop and ask for permission from the court to collect debts. The automatic stay remains in place until your case is closed and the discharge is issued. Here is how the automatic stay will protect YOU, and other things that you should be aware of.
If you are being levied/garnished by the IRS (or state taxing entity), they will release the garnishment immediately upon the filing. The release will occur by law; there are no negotiations or disclosures necessary for this to happen. This is the quickest and most effective method of stopping a levy.
New Levies or Liens
The IRS is also forbidden from initiating any new levies, or filing any new tax liens. So if the IRS has not attached your home (or other property) with a tax lien, they cannot do so once you file your bankruptcy. This result could have immense implications after the bankruptcy (which will be discussed later) because the IRS rights so this property may survive the bankruptcy if there is a lien.
Collection Calls from the IRS
The IRS generally will not contact you after you file your bankruptcy. They will code your case to be in “litigation status” and the IRS collectors will wait until that status is removed before they contact you again.
What the IRS Can Do
Be aware that the automatic stay will not help you if the IRS wants to audit or continue an audit of you, nor will it prevent the IRS from demanding that you file a tax return. But whenever possible, you should plan your bankruptcy so that it will discharge as much tax debt as possible. This planning would entail that there be no audits in progress and no unfiled tax returns.