Dealing With Your Tax Debt in Bankruptcy

If your tax debt meets certain qualifications, it can be discharged if you file for bankruptcy. Filing for bankruptcy can also give you the opportunity to pay back your recently assessed taxes through a payment plan that is lower than what the IRS offers. Below, we explain how bankruptcy can help you deal with your IRS tax debts.

Will Bankruptcy Stop the IRS from Harassing Me?

Once you file your bankruptcy case, an injunction known as an automatic stay will go into effect. This injunction informs your creditors, including the IRS, to cease collection activity. This means your creditors will no longer be able to send you letters, garnish your wages or bank account, or file liens against your property.

The automatic stay will be in effect throughout the duration of your bankruptcy case. Only the bankruptcy court can lift the stay if a creditor makes a request. However, the creditor must have a good reason for why the stay should be lifted. After your bankruptcy case has closed, the IRS will be free to continue collecting debts, unless that debt has been discharged or paid entirely.

It is important to note that although the automatic stay will go into effect when you file for bankruptcy, it might not go into effect if you end up filing for subsequent bankruptcies.

Which of My Tax Debts Can I Discharge?

Although you can discharge you debt in bankruptcy, not all of your tax debts will qualify. Your tax debts will need to meet the following criteria if you want to have them discharged:

  • Your debt is for wage-related income or gross receipts.
  • Your income taxes were due at least 3 years before you filed for bankruptcy.
  • Your tax return was filed at least 2 years before your bankruptcy case. Debts that weren’t filed or filed late usually don’t qualify for discharge.
  • Tax assessment from the IRS has to occur 240 days before you file for bankruptcy.
  • You haven’t committed fraud and did not willfully attempt to evade paying your taxes for the tax year in question.

If your tax debt situation meets this criteria, there is a possibility that your debt can be eliminated. If you don’t meet these guidelines, you likely won’t be able to discharge your tax debts through bankruptcy.

What About My Non-Dischargeable Tax Debt?

How your non-dischargeable debt is treated will depend on what type of bankruptcy you file.

  • Chapter 7 Bankruptcy: Other than the automatic stay, filing for Chapter 7 bankruptcy doesn’t have much of an effect on your tax debts that can’t be discharged. If your bankruptcy case doesn’t result with your IRS tax debt being discharged, the IRS will be free to resume their collection actions against you.
  • Chapter 13 Bankruptcy: This type of bankruptcy can be used to manage your non-dischargeable tax debts. In a Chapter 13 bankruptcy, you propose a plan for paying your IRS debt over a three- to five-year period. Under Chapter 13, you have the benefit of discharging your older unsecured IRS debt, and your non-dischargeable debts will eventually be paid off with your payment plan.

Do you have more questions about tax debt or filing for bankruptcy? Contact our Worcester team of bankruptcy attorneys to get the answers you need.