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Can bankruptcy eliminate my tax debt?

With April 15 around the corner, tax season is in full swing. Although this is a painful time of the year for many, it is especially grueling if you owe income taxes from previous years. If you are struggling with this type of debt, you may assume that filing bankruptcy would be able to discharge your debt. However, in reality, bankruptcy does not offer the quick and direct solution you may be looking for.

Limitations on discharge

Unlike many other types of debt, income tax debt does not automatically qualify for a discharge under the bankruptcy laws. In order to determine whether it would qualify for the discharge, it is necessary to examine your back tax debt from each year separately to see if it meets the criteria necessary for a discharge under the law:

  • The tax debt must have been overdue for at least three years
  • You must have filed your tax return for the debt two or more years ago
  • The IRS (or taxing body) must have assessed the tax debt at least 240 days ago
  • You must not have attempted to defeat or evade your taxes, or file a fraudulent return

If your tax debt meets all of the above criteria, it is eligible for the bankruptcy discharge. Once your debt is discharged, you no longer have to repay it.

Consider bankruptcy if you do not qualify for discharge

Even if your debt does not qualify for an immediate discharge, it is important not to get discouraged; bankruptcy may still be able to help you. If your owe other types of debts, and your tax debt is a smaller percentage of your total debt load when compared to your other debts, filing Chapter 7 may be a good solution. This is because Chapter 7 can quickly discharge most other types of debt, such as medical bills, credit cards and utility bills. Once you have been relieved of your other types of debt, you may find that you are able to manage your tax debt.

If you owe larger amounts of tax debt, Chapter 13 bankruptcy may help you by consolidating your tax debt into a repayment plan. Under the plan, you pay off your tax debt in monthly payments over 3-5 years. Since the payments are spread out over this period, your payments are much more affordable. While you are paying off your debt, the bankruptcy laws prevent the IRS from suing you, garnishing your wages or doing anything else to collect the tax debt. Additionally, you are protected against being charged interest and late payment penalties on your debt.

Whether bankruptcy is the best way to deal with your tax debt depends on your unique situation. An experienced bankruptcy attorney can go over your options with you and recommend the best way to proceed.