If you cannot pay your debts, one option is to go bankrupt. One of the effects of bankruptcy is that you do not have to pay most of your debts.  But does this include all tax debts you owe?

What happens to tax debts generally in bankruptcy

Tax debts are treated like most other debts in bankruptcy.  That is once you go bankrupt you do not have to pay them.  And once your bankruptcy is finished you are released from your tax (and most other) debts.

This includes tax debts for outstanding lodgements no matter how far back they go.  However, if you go bankrupt you still need to make outstanding tax lodgements and if you don’t the ATO can fine you and if the fine occurs after you have gone bankrupt you will have to pay it.

Are there any exceptions?

The only exception to the above is if the ATO has issued a Garnishee Notice before you go bankrupt.  If the ATO has done this the notice will stay in place during the period of your bankruptcy.

One way this will cause a major problem is if the ATO has issued a Garnishee Notice to your employer.  The ATO can do this to garnishee a percentage of your gross wages directly from your employer.  And if the Garnishee Notice was issued before you go bankrupt then your employer will have to keep making payments to the ATO from your wages during your bankruptcy.  One option is you may be able to change jobs but this can be easier said than done.

So what should you do?

If you have a large personal tax debt which you cannot pay, bankruptcy can be an option.  Depending on your circumstances bankruptcy can release you from having to pay the ATO with very limited consequences.  But you should get professional advice about your situation before you consider going bankrupt.

Contact us for assistance

 If you are having difficulties paying your tax debts, the professionals at TAX DEBT SOLVED can help with a free, no-obligation consultation.  So, contact us today.