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Can Tax Debt Be Discharged in Bankruptcy?

With tax season upon us, it’s a great time to reflect on some of the finer tax-related points when it comes to bankruptcy – chief among them being dischargeability.

For consumers who’ve encountered tough financial times, there’s no question that bankruptcy has powerful mechanisms to help them right the ship and find solid financial footing. Among these are things like the automatic stay, which immediately halts debt collection activities while bankruptcy is pending and provides needed breathing room to attend to your case. Another, and perhaps the most important one, is the discharge of debts.

What Is the Debt Discharge in Bankruptcy Again?

Both Chapter 7 bankruptcy and Chapter 13 bankruptcy (the bankruptcy chapters most used by individual consumers) offer debtors meaningful debt relief through a discharge of debts.

In Chapter 7 cases, this discharge takes place after assets, if any exist, are liquidated and proceeds are used to pay at least some of the principal debt balances. In Chapter 13, it occurs following a three- or five-year payment plan during which wage-earning debtors pay down their debt. When a discharge is issued, a debtor is released from liability for those debts and is no longer legally required to pay them.

While the debt discharge is perhaps the most defining and powerful aspect of the U.S. bankruptcy process, it has its limitations. Specifically, the discharge only applies to certain types of debts. These dischargeable debts can vary depending on the bankruptcy chapter being used and other circumstances, but commonly include:

Of course, this means that certain types of debt are not dischargeable in bankruptcy. These generally include debts related to things like child or spousal support, student loans, HOA fees, court or government fines, and, notably, many types of taxes.

Criteria for Tax Debt to Be Dischargeable in Bankruptcy

Tax debts are treated differently in bankruptcy than debts like credit card debt or medical debt. And while some types of tax debt do not qualify for a discharge, some tax debt may.

While every case is different, there are some general criteria that must be met to discharge tax debt under the bankruptcy code. For example:

  1. You must have filed your income tax returns for at least the previous two years before filing your bankruptcy petition.
  2. The tax debt must be “old debt,” meaning that it has been due for at least three years. Tax debt that is less than three years old (after the date the tax return was due, with extensions) is not dischargeable.
  3. You have not made any attempt to file a fraudulent tax return, evade taxes, or otherwise commit tax fraud.
  4. The IRS must have assessed the tax debt at least 240 days prior to the filing of the bankruptcy petition. If the IRS stopped its collection activities during this time, the 240-day period may be extended.

Debtors with tax debt that meets these criteria may be able to discharge the debt and any associated penalties. As in the case of other discharged debts, debtors will no longer be liable for paying discharged tax debt and the IRS can no longer seek to collect.

Have Debt & Tax Questions? We Can Help.

Taxes and bankruptcy can get confusing even for the most financially savvy consumers, which is why the best way to determine how bankruptcy will impact your tax situation is to have your case personally reviewed by an experienced attorney.

At Licata Bankruptcy Firm PC, our attorneys can discuss your tax debts and whether they may qualify for a discharge under bankruptcy. Even if you have tax debts that can’t be discharged, we can discuss how bankruptcy may help you deal with other types of debt so that you can better address your tax concerns, or whether you may have other debt relief options, such as the ability to negotiate reduced debt payoffs with the IRS.

If you have questions about debt, bankruptcy, and taxes, we’re here to help. Call (417) 213-5006 or contact us online to request a consultation.