How Is My Tax Debt Impacted By Bankruptcy?

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Do you have mounds of old tax debt that you want to get discharged? If you are hoping to get it eliminated by filing for bankruptcy, it can be complicated. Learn what options you have when filing Chapter 7 or Chapter 13 bankruptcy.

Tax Debt Under Chapter 7 Bankruptcy

If you are filing for Chapter 7 bankruptcy, you may be able to discharge your tax debt under the following circumstances:

  • The debt is from federal or state income tax debt.
  • You did not purposely evade paying taxes or file a fraudulent return.
  • Your debt is from at least three years ago.
  • You filed a tax return at least two years before filing for bankruptcy.
  • Your tax debt was assessed by the IRS at least 240 days before you filed for bankruptcy.

If you do not meet these requirements, then you may not be able to discharge your debt.

Tax Debt Under Chapter 13 Bankruptcy

When you file for Chapter 13 bankruptcy, the requirements to get your bankruptcy discharged are different than under Chapter 7 bankruptcy. It depends on whether the debt can be considered priority tax debt, or nonpriority tax debt.

Priority Tax Debt

Priority tax debts are tax debts over the most recent 3-4 tax years depending on the timing of your bankruptcy. In most cases, taxes are given special treatment in bankruptcy. As priority debts, these get paid before other obligations. In Chapter 13, you must make them part of the repayment plan and pay them back in full. You cannot eliminate priority tax debts by just filing for bankruptcy. Some of the most common types of priority tax debts you might have include:

  • Recent income tax debt.
  • Property taxes were tallied one year before filing for bankruptcy.
  • Taxes you were required to withhold or collect. A common example of this is payroll taxes.
  • Penalties related to non-dischargeable taxes.

While this does not allow you to discharge your tax debts, Chapter 13 bankruptcy often provides a way to more affordably pay your taxes throughout your repayment plan.

Nonpriority Tax Debt

When you file for Chapter 13 bankruptcy, you might be able to discharge older income tax debt if you can qualify them as nonpriority tax debts. Under these circumstances, your nonpriority tax debt can get lumped in with your other nonpriority debts (like medical bills). When you can treat your tax debt as your other nonpriority debts, then it will be repaid by the court-appointed trustee who pays your other debts through your repayment plan. Under this situation, any remaining tax debt at the end of your repayment plan may be eliminated.

Your income taxes may be considered to be nonpriority debt if they meet the following criteria:

  • The tax return was due at least three years before you filed for bankruptcy.
  • You actually filed your return at least two years before filing for bankruptcy. (Tax returns that were not filed may not be subject to discharge.)
  • Your liability for the tax debt was not assessed by the IRS within 240 days of filing for bankruptcy.
  • You did not commit tax evasion.
  • You complied with all of the relevant tax laws.

How a Bankruptcy Attorney Can Help

If you have large amounts of tax debt, you should consult a bankruptcy attorney to determine if you can discharge it through Chapter 7 or Chapter 13 bankruptcy. An attorney can evaluate your debt and help you decide if it is a priority or a nonpriority debt.

Let Us Help You

When you have tax debt that you want to eliminate through bankruptcy, let our lawyers at The Law Offices of Alexzander C.J. Adams, P.C. help you sort through your options. We work for you, the people, and not institutions. Contact us for a free case evaluation, or no-obligation consultation. We are dedicated to helping you overcome this small bump in the road and assisting you to get on with your life.

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