Does Bankruptcy Clear Tax Debt?

While most taxes are not dischargeable in bankruptcy, some are. Although complicated, bankruptcy filing and determining if your obligations are dischargeable could result in the elimination of some tax debt.

Tax obligations may be discharged in some circumstances by declaring bankruptcy. It’s an option for many people who owe past-due federal taxes that they cannot pay. However, it is not always a solution.

Thus, if you are having trouble paying your overdue taxes, you need to know if filing for bankruptcy is the right choice for you. If not, you should look for other options, such as an offer in compromise or IRS payment plans.

Does Filing Bankruptcy Clear Tax Debt?

It is a question that cannot be answered in a generalized way. The type of bankruptcy filed will determine part of the response. Nevertheless, there are two general rules for what constitutes dischargeable:

1. Income tax debt cannot be fresh (at least 240 days)
2. It must be income taxes

The income tax debt must have been lodged at least 3 years before filing. This debt also had to have been known to the IRS. Bankruptcy will not erase the debt if a false return is filed. Similarly, the debt won’t be cleared in the event of an earlier attempt to conceal the problem.

Related: How to file bankruptcy

In a bankruptcy case, certain tax debts may be allowed. This doesn’t mean you should count on allowances. Instead, you need to consult an attorney to see if any of those exceptions apply to your specific situation. Whether you want to file a Chapter 7 or Chapter 13 bankruptcy, look for a trusted and experienced bankruptcy attorney.

How to Discharge Tax Debt by Filing a Chapter 7

Compared to Chapter 13 bankruptcy, it is generally a less complicated and faster way to get rid of tax debt. Even so, you need to qualify for Chapter 7 bankruptcy first. Under Chapter 7, you will be able to clear your tax debt if you meet the following requirements:

• It must be the income tax. There are federal and state income taxes. Please note that you will not be able to eliminate other taxes, like payroll taxes or fraud penalties, through bankruptcy.
• The debt dates back 3 years or more. This means your original tax return is supposed to be due at least three years before you file for bankruptcy.
• Nothing dishonest was done by you to avoid filing your taxes. Do not try to do anything fraudulent! You shouldn’t intentionally submit a false tax return or avoid paying your taxes. Act in a legal manner. otherwise, your debt will not be cleared through bankruptcy.
• 240 day rule: The IRS must have determined the tax debt a minimum of 240 days prior to your filing. This deadline can be extended if the IRS has halted collection efforts because of a compromise or earlier filing.
• At least 2 years before filing for bankruptcy, you need to submit a tax return for the debt you intend to eliminate. If you file after the permitted extensions, your debt is not likely to be dischargeable.

How to Discharge Tax Debt by Filing a Chapter 13

Chapter 13 is the most common bankruptcy type for individuals. While this debt reorganization is not as quick as Chapter 7, it’s a smarter option for most people who deal with tax debt. If you want to clear your debt with Chapter 13, keep in mind the following facts:

• If your tax debt is more than 3 years old, it may be forgiven based on your disposable income. Take into account necessary expenses when calculating this amount.
• Within 4 years of filing for bankruptcy, you have to submit all necessary tax returns when it comes to tax periods that end. Otherwise, your tax debt will not be discharged.
• Additional penalties or interest will not be incurred by discharged tax debt. Keep filing all necessary returns during your bankruptcy, or request an extension of time for submitting them. Be sure to pay each current tax as it comes due during the bankruptcy case.
• If your current tax obligations are met and the plan includes your income, your repayment plan must be abided by the IRS.
• Chapter 13 may be used to satisfy IRS tax liens.

Tips on How to Pay Off Your Tax Debts

Before you go, read the following tips for paying off tax debts. It’s worth reading!

• Working with a tax lawyer is the best option. The attorney can help you choose an option or program with the IRS that would be the best solution to your situation.
• Enter into an installment agreement that is mutually agreeable in case you require more time to settle your outstanding taxes. However, remember that during your payback period, the fees and interest rates accrue.
• Consider applying for a new credit card. It can help in spreading out payments and avoiding debt interest. Be careful! It can also make debt deeper and lower credit scores.
• Take advantage of a federal program called Offer in Compromise. It may enable you to repay less in taxes than you owe. This program is particularly beneficial for low-income individuals and families.
• As a small business owner running a start-up, check if the IRS can give you an extension of 60-120 days, allowing you to pay your business taxes altogether.
• Seek a partial or full abatement of penalties. It can significantly reduce your debt.
• As soon as you can, pay in full to save penalties and interest.

The bottom line is that some taxes can still be cleared through bankruptcy under certain conditions. Filing for bankruptcy will stop further attempts to collect the debt. However, it can’t eliminate any liens placed on assets by tax collectors.