Bankruptcy is a federal legal proceeding that helps debtors with financial difficulties get relief. The goal of bankruptcy is a fresh start through either discharge of certain debts or repayment of debt through the bankruptcy. Bankruptcy begins with the filing of a petition. The bankruptcy includes all debts prior to the petition (these are known as prepetition debts).
Once a debtor files a bankruptcy petition, the automatic stay prevents creditors from taking actions to collect debts from the debtor. However, bankruptcy does not stop the Georgia Department of Revenue from:
- Conducting an audit to determine a tax liability
- Issuing a notice of tax deficiency
- Demanding tax returns
- Making an assessment for any tax and issuing a notice and demand for payment of such an assessment
- Issuing refunds on tax returns and offsetting those refunds against assessed taxes when certain conditions apply
- Offsetting tax refunds to tax debt under certain conditions
For bankruptcy protection to be effective, the debtor’s creditors must have notice of the bankruptcy. The official address to notify the Department of a bankruptcy is:
After the Department receives notice of the bankruptcy, it may file a Proof Claim with the Bankruptcy Court listing the debtor’s debts owed to the Department. While some taxes are discharged in bankruptcy, many are not. Taxes that are not discharged or paid during the bankruptcy are still collectible after a debtor successfully completes the bankruptcy process.
Bankruptcy does not relieve a debtor of the obligation to file all required tax returns and pay taxes that become due during the bankruptcy case. Failure to file and/or pay current taxes during bankruptcy may result in dismissal of a debtor’s bankruptcy case.
Joint Tax Liabilities
Only the individual or entity that files bankruptcy gets the benefits of the automatic stay and discharge.
Individual Income Tax
Married individuals may file bankruptcy jointly or separately. If only one spouse files bankruptcy, but the tax returns were filed jointly, the spouse who did not file bankruptcy will still be subject to collection action and will not receive a discharge from the liability.
Businesses Trust Fund Taxes
Individuals involved in a legal business entity (for example, a corporation or limited liability company) may be held personally responsible for delinquent trust fund tax debts of the business entity (for example, sales tax and withholding tax). A business entity filing bankruptcy does not protect the individual nor make the individual’s debts subject to discharge. Likewise, an individual filing bankruptcy does not protect nor make a business entity’s debts subject to discharge.
When the Department receives notice of a debtor’s bankruptcy, it will review the account and determine which debts are subject to discharge. Certain tax debts may no longer be collectible after a debtor receives a discharge. If debts are not discharged, the Department may resume all appropriate collection action under state law to collect the outstanding debt.
A tax lien will continue to exist after the entry of a bankruptcy discharge with respect to all property the taxpayer owns on the date he or she filed for bankruptcy. Although the tax lien survives bankruptcy, the taxpayer’s personal liability to pay the tax will be released if all other requirements for a bankruptcy discharge are satisfied. This means that after the entry of a discharge order, the Department cannot collect the tax as a personal obligation of the taxpayer, but can pursue collection by seizing and selling any property the taxpayer owned on the date he filed for bankruptcy.
If a Debtor’s bankruptcy case is dismissed prior to the Debtor receiving a discharge, the Department will proceed with all appropriate collections actions regarding all tax debt owed by the debtor.
The Department typically offsets a taxpayer’s refund to a tax debt from another year. However, if the taxpayer is in bankruptcy, the Department may do so only in limited circumstances. A tax refund owed for a period prior to the bankruptcy filing may be offset to a debt for a period prior to the bankruptcy. Similarly, a refund due for a period after filing bankruptcy may only be offset to debt from a period after the bankruptcy filing. When debtors are jointly liable for a tax debt and only one of the debtor’s is in bankruptcy, a refund belonging to the debtor not in bankruptcy can still be offset to the joint tax debt.