Although bankruptcy can eliminate a substantial portion of your overall debt, you need to be cautious if you want to use it to get rid of your tax debt. If you owe back taxes and file for Chapter 7 bankruptcy, the tax debt likely won’t be wiped out, and you will still need to pay what you owe after the bankruptcy is finalized. If you file for Chapter 13 bankruptcy, you will have to repay your tax debt in full as part of the repayment plan.
Is It Possible to Discharge Tax Debt Through Bankruptcy?
Although most tax debts can’t be eliminated in bankruptcy, it is possible to discharge eligible tax debt in a Chapter 7 bankruptcy.
In order to have your tax debt discharged in Chapter 7, you must meet all of the following conditions:
- The tax debt you owe is for income taxes. All other taxes, like payroll taxes or fraud penalties, can’t be eliminated in bankruptcy.
- The tax return you filed isn’t fraudulent and you didn’t willfully attempt to evade paying your taxes.
- The tax debt is at least three years old. The due date on your tax return must be expired for at least three years before you can file for bankruptcy.
- You filed a tax return for the debt you want to discharge at least two years before filing for bankruptcy.
- The IRS must assess your income tax debt at least 240 days before you file your bankruptcy petition, or not at all. This time limit can be extended if the IRS suspended collection activity due to an offer in compromise or a previous bankruptcy filing.
Some jurisdictions have additional requirements, which is why you should consult with a knowledgeable bankruptcy lawyer to discuss all of your options under the law.
Using Chapter 13 Bankruptcy to Manage Tax Debt
For some debtors, filing for Chapter 13 bankruptcy is a smart move to manage tax debt. Generally, dischargeable taxes older than three years can be forgiven without any payment at all, depending on how much disposable income remains after the debtor deducts reasonable and necessary expenses from their pay.
Dischargeable taxes won’t incur additional interest or penalties in bankruptcy; however, debtors must pay interest on non-dischargeable taxes. Debtors can also satisfy an IRS tax lien with a Chapter 13 plan. The IRS must stick to the plan as long as all the debtor’s outstanding income tax is included, and they keep their tax returns and post-petition tax obligations current during the Chapter 13 bankruptcy.
It’s important to note that any non-dischargeable tax that isn’t eliminated in bankruptcy must be paid in full during the three- to five-year Chapter 13 repayment plan. After the repayment plan is completed, the debtor is caught up on taxes and most or all of their other debts.
Consult with Our Dedicated & Knowledgeable Bankruptcy Team Today
At Blake Goodman, PC, Bankruptcy and Debt Settlement Attorneys, we possess more than 80 years of combined experience in this area of law. Our esteemed, award-winning legal professionals are here to listen to all of your concerns and help you get back on your feet. We proudly use our extensive resources and practical legal insight to assist Hawaiians of all backgrounds who want to get rid of debt and take control of their futures. If you are ready to embark on your journey to financial freedom, then please reach out to our team today to discuss your case.
Give us a call at (808) 518-4844 or contact us online to schedule a case consultation with our attorneys.
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Blake Goodman received his law degree from George Washington University in Washington, D.C. in 1989 and has been exclusively practicing bankruptcy-related law in Texas, New Mexico, and Hawaii ever since. In the past, Attorney Goodman also worked as a Certified Public Accountant, receiving his license form the State of Maryland in 1988.
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