If you are dealing with financial hardship, filing for bankruptcy could help relieve your burden. You could resolve your debts and regain control of your financial situation. But, if you have tax debt is important to understand how that bankruptcy can have implications for your tax debt. This article will explore the impact bankruptcy has on your taxes, specifically focusing on Chapter 7 and Chapter 13 bankruptcies.

Chapter 7 Bankruptcy and Tax Debt

Chapter 7 bankruptcy (a.k.a. “straight” bankruptcy)involves the liquidation of assets to repay creditors, although exemptions may protect most of your property. While not all tax debts are dischargeable in bankruptcy, there are certain criteria under which tax debts can be eliminated in a Chapter 7 bankruptcy.

To qualify for the discharge of tax debts in Chapter 7 bankruptcy, the following conditions must be met:

  1. The tax debt must be for income taxes. You cannot file bankruptcy on other types of tax debts, such as payroll taxes or penalties based on fraud.
  2. The tax debt must be at least three years old. This means that the due date for filing the tax return on which you owe the debt must have been three years before the date you file bankruptcy.
  3. The tax return was filed at least two years before filing for bankruptcy.You must have filed the tax return on which you owe the debt at least two years before filing for bankruptcy.
  4. The tax assessment must be at least 240 days old. This means the IRS or state tax authority must have assessed the tax debt at least 240 days before you file bankruptcy.
  5. The tax return must not be fraudulent, and you must not have attempted to evade paying taxes. If you engaged in fraudulent activity or willfully attempted to evade paying taxes, the tax debt will not be dischargeable.

If you meet these criteria, your tax debt could get eliminated, and you will no longer have the responsibility of repaying it.

However, you need to know that even if you successfully discharge your income tax debt in Chapter 7 bankruptcy, federal tax liens placed on your property before you filed for bankruptcy will remain. To clear the title and sell the property, you need to pay the tax lien in full.

Chapter 13 Bankruptcy and Tax Debt

Chapter 13 bankruptcy (a.k.a.reorganization bankruptcy) involves creating a repayment plan to repay debts over three to five years. The bankruptcy court structures the repayment plan based on a debtor’s income and ability to pay.In Chapter 13 bankruptcy, tax debt, along with other debts, becomes part of your repayment plan. You will have to repay the tax debts throughout your repayment plan. However, tax debts that meet the requirements outlined earlier for Chapter 7 bankruptcy could be discharged if you establish insufficient disposable income to pay them through the plan.

Similar to Chapter 7 bankruptcy, federal tax liens placed on your property before filing for Chapter 13 bankruptcy will not get discharged. You may be able to satisfy the tax lien by paying the amount owed per the repayment plan.

Getting Help Filing Bankruptcy

Understanding how bankruptcy could affect your tax debt can be challenging. You may wish to seek the help of an experienced bankruptcy lawyer to provide valuable guidance and help determine the best course of action for your specific financial circumstances.

Brock and Stout’s bankruptcy lawyers have over 25 years of experience helping clients with tax debt successfully file bankruptcy. Contact us today for a free evaluation of your tax debt situation to see if we can help you get a financial fresh start.