How to Declare Bankruptcy as a U.S. Expat in a Foreign Country
If you owe past due federal taxes that you cannot pay, bankruptcy may be an option. Your back taxes, interest and penalties may be wiped out by filing bankruptcy. If you qualify, bankruptcy might be an excellent solution to resolve your crushing tax problems.
Unfortunately, not everyone qualifies to wipe out their tax debt in bankruptcy. Certain rules have to be met first. If you file bankruptcy and don’t meet the rules, the IRS will still be in hot pursuit after your bankruptcy is over. Proper pre-bankruptcy planning is key to determining if bankruptcy is or can be a viable solution.
Your Tax Obligations Under Bankruptcy
Before you consider filing bankruptcy, there are some things you should know:
- You must file all required tax returns for tax periods ending within four years of your bankruptcy filing.
- During your bankruptcy you must continue to file, or get an extension of time to file, all required returns.
- During your case you should pay all current taxes as they come due.
- Failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed.
Five Rules to Discharge Tax Debts
For a tax debt to be dischargeable under a Chapter 7 or Chapter 13 bankruptcy petition, there are a few rules that must be met:
- The due date for filing a tax return is at least three years ago. The tax debt must be related to a tax return that was due at least three years before the taxpayer files for bankruptcy. The due date includes any extensions.
- The tax return was filed at least two years ago. The tax debt must be related to a tax return that was filed at least two years before the taxpayer files for bankruptcy. The time is measured from the date the taxpayer actually filed the return.
- The tax assessment is at least 240 days old. The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
Tax Debts Not Dischargeable
Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer actually files a tax return for the year in question.
There are a few other exceptions, but if the tax does not meet the criteria above, it is considered a priority debt and cannot be discharged in bankruptcy.
7 Tips to Declare Bankruptcy for Expats
Dealing with bankruptcy can be complicated. The legal process itself is already tedious, and the stress you receive from your debt collectors just makes the experience a lot harder. Filing for bankruptcy in the United States is already confusing, so imagine how hard it must be for those living abroad.
To help you out, below are some tips explaining how you can declare bankruptcy if you are an expat in a foreign country.
1. Hire an attorney
As with all legal matters, it’s best to seek the services of a legal professional. The law may allow you to file for bankruptcy without an attorney, but considering the complexity of the process, doing so is highly discouraged, especially if you’ve failed to file for tax returns or dealt with other complicated issues.
Having an advisor who is experienced in bankruptcy proceedings will make it easier for you to get back on track.
2. Learn the types of personal bankruptcy
There are two main forms of bankruptcy that individuals can apply for: Chapter 7 and Chapter 13.
- Chapter 7 – To pay off your lenders, Chapter 7 bankruptcy will require you to liquidate your assets, including your properties, vehicles, and even personal items such as clothing. Government benefits such as your social security are the only exceptions.
- Chapter 13– This type of bankruptcy allows you to retain ownership of your assets but will obligate you to settle your debts from three to five years. This form of bankruptcy is usually filed by people who want to gain more time against property foreclosures and seizures.
3. Attend a counseling session
Applying for bankruptcy means that you’ll need to file the bankruptcy petition in the U.S. But before you file a petition, you’ll be required to attend a counseling session organized by an authorized agency. The counselor will review your financial standing and let you know if you’ll need to declare for it.
If your situation isn’t bad, the counselor will likely touch on the bankruptcy alternatives that you can take. If filing is necessary, you should discuss matters with your attorney.
4. Obtain a certificate to file with your bankruptcy petition
Once you’re done with counseling, you’ll receive a certificate of completion. This serves as proof that you’ve had your situation assessed and you’re aware of the process and possible effects of bankruptcy. Afterward, you should head to the nearest bankruptcy court to obtain the necessary forms.
5. Submit a bankruptcy petition with your financial statements (income, debts, assets)
Along with your certificate, you’ll need to collect financial statements. The documents you present should show all the income, debt, and assets that you’ve accumulated through the years. Hiding any important details may result in your application’s denial (and in graver cases, imprisonment), so always stay transparent.
6. Submit a means test form
After you’ve sent the necessary documents, you’ll be asked to submit a means test form. This assessment will help the judge determine which type of bankruptcy you’re qualified for. If your income is stable enough, you will have the option to apply for Chapter 7. In case your income is a bit low, you will be required to file for Chapter 13.
Upon completion, the trustee of your case may organize a meeting with creditors. People or entities that you owe money to may inquire about your current financial situation and the plans you have on repaying them, so be prepared to provide answers.
7. Wait for the decision of the bankruptcy judge
After all is said and done, your case will be reviewed by a bankruptcy judge. All the information you’ve supplied will serve as the basis for his decision, so do not attempt to hide or tweak any crucial details.
If your application gets approved, all the debt that you owe will immediately be discharged. However, keep in mind that some dues, such as student loans and taxes, are not included. In case you’re facing tax problems with the IRS, you should consider acquiring tax resolution services.
Frequently Asked Questions About Bankruptcy for U.S. Expats
Yes. As a U.S. citizen or Green Card holder, you can file for bankruptcy in a U.S. court even while living overseas. You’ll need to meet the jurisdictional requirements, usually based on where you last lived or conducted business in the United States.
Most individuals file under Chapter 7 or Chapter 13. Chapter 7 involves liquidating assets to pay creditors, while Chapter 13 allows you to create a repayment plan over three to five years.
In most cases, no. Bankruptcy courts allow telephonic or virtual appearances for expats. However, you must still provide complete and truthful financial documentation as required by the court.
Yes. When you file for bankruptcy, you must disclose all your assets, including those held abroad. The court will determine which assets are protected or subject to liquidation.
A U.S. bankruptcy affects your credit within the United States and may appear in international reports if you use global financial institutions. However, foreign creditors are not automatically notified unless they’re listed in your case.
It depends. Some older income tax debts may be discharged if they meet specific criteria under U.S. bankruptcy law. However, most recent tax obligations and penalties cannot be eliminated through bankruptcy.
File for Bankruptcy Responsibly
Dealing with bankruptcy can be overwhelming, but it doesn’t have to be when you know the steps you are taking. As long as you’re fully aware of your situation and understand the measures you can take for relief, settling balances can be done with ease.
In case your situation is a bit more complex, seeking the advice of experts will be one of your best decisions. Get in touch with a reliable tax resolution partner and visit our page today!
