When you go into bankruptcy, one of the main things you may be struggling with is tax debt. In many cases, this kind of debt can’t be eliminated, and that can make it much more difficult for you to manage your debts in general. If you’re several years behind on your taxes, you could be facing wage garnishments and other debt collection activities, but you may be in luck with Chapter 7 bankruptcy.
In some cases, tax debts can be discharged. It’s more likely that you’ll be able to get your debt discharged if you’re in a Chapter 7 bankruptcy than if you decide to pursue a Chapter 13 bankruptcy. Chapter 13 bankruptcy requires a repayment plan while Chapter 7 requires liquidation of your assets.
The age of the tax debt along with the kind of tax debt it is matters. If your taxes are for income taxes, you may be able to get them discharged as long as payroll taxes or penalties for fraud aren’t included. You must have filed a tax return for at least two years before the bankruptcy, and you tax liability must be at least three years old. If the IRS assessed your debt 240 days or earlier than your bankruptcy, it’s eligible for review.
If you didn’t commit willful tax evasion or commit tax fraud, you’re more likely to get the debt discharged. Penalties, like fees for late payments, can also be discharged if your tax is marked as dischargeable. Tax penalties from ineligible debts, unfiled tax returns or trust fund taxes can’t be discharged in Chapter 7 bankruptcy.
Source: FindLaw, “Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy,” accessed July 10, 2015