The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made significant changes to the Bankruptcy Code.
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Taxes, as well as other debts, can be discharged in bankruptcy proceedings. There are limitations and each case requires careful analysis before a bankruptcy petition is filed.
The following text has been taken from the United States Bankruptcy Court web sites:
Bankruptcy is a way for people and businesses who owe more money than they can pay right now (‘debtors') to either work out a plan to repay the money over time in a case under chapter 11, chapter 12 or chapter 13, or to wipe out (‘discharge') most of their bills in a chapter 7 case. The filing of a bankruptcy petition immediately stops most actions to collect debts which were due at the time of filing, including law suits, repossessions, and foreclosures. Based upon the circumstances, the court may, however, permit some eviction, repossession and foreclosure actions to continue even after the case is filed.
Chapter 7 is the liquidation chapter of the Bankruptcy Code. Chapter 7 cases are commonly referred to as "straight bankruptcy" or "liquidation" cases, and may be filed by an individual, corporation, or a partnership. Under chapter 7, a trustee is appointed to collect and sell all property that is not exempt and to use any proceeds to pay creditors. In the case of an individual, the debtor is allowed to claim certain property exempt. In exchange for this, the debtor gets a discharge, which means that the debtor does not have to pay certain types of debts. Corporations and partnerships do not receive discharges. Consequently, any individuals legally liable for the partnership's or corporation's debts will remain liable. Therefore, individual bankruptcies may be required as well as the corporation or partnership bankruptcy.
Chapter 13 is the debt repayment chapter for individuals with regular income whose debts do not exceed $1,347,550 ($336,900 in unsecured debts and $1,010,650 in secured debts), including individuals who operate businesses as sole proprietorships. It is not available to corporations or partnerships. Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future income. Each chapter 13 debtor proposes a repayment plan which must be approved by the court. The amounts set forth in the plan must be paid to the chapter 13 trustee who distributes the funds for a percentage fee. Many debts that cannot be discharged can still be paid over time in a chapter 13 plan. After completion of payments under the plan, chapter 13 debtors receive a discharge of most debts.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made significant changes to the Bankruptcy Code.
Mandatory Pre-Bankruptcy Credit Counseling: All individual debtors who file bankruptcy on or after October 17, 2005, must undergo credit counseling from an approved counseling agency within 180 days before filing for bankruptcy.
Mandatory Debtor Education Course after Filing: Individual debtors filing under chapters 7 and 13 must complete a personal financial management (or debtor education) course before they will be granted a discharge. This debtor education course is separate from and required in addition to pre-bankruptcy credit counseling.
Means Test: Individual debtors who file a chapter 7 petition must file a new form which will give detailed information about their income for the purpose or determining whether a debtor's filing represents an abuse of the bankruptcy system. Some debtors may be prohibited from filing a chapter 7 case if their income would permit them to make payments to their creditors.