Can Bankruptcy Help My Tax Debts?

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While some people who file bankruptcy are burdened with credit card debt, some are burdened with debt to Uncle Sam for past due income taxes.  Tax debt can be included in a bankruptcy, but there are rules and in most cases, you will have to pay your taxes.  To understand the difference in the way tax debt can be discharged, you have to understand two most common types of bankruptcies.  Chapter 7 wipes away all of your debt and you are no longer obligated to pay it.  Chapter 13 reorganizes your debt and puts you on a plan to repay your debts.  If income tax debt is included in a Chapter 13 payment plan, it is considered a priority debt and must be paid before other debts. 

Some people have misconceptions about tax debt and bankruptcy.  Here are three common myths.

1. Myth: Income tax debt is never discharged.  Fact: If you file a Chapter 7 and you have tax debt that is more than three years old and your taxes were filed on time, in some cases that debt can be discharged. 
2. Myth: Interest and penalties will continue to accrue if I put my income tax debt in a Chapter 13 payment plan.  Fact: You will have to pay all of the interest and penalties up until the time you filed your Chapter 13 but you will not be assessed any additional fees after you file.  The accrued interest and penalties will be included in your bankruptcy. 
3. Myth: Filing bankruptcy will wipe out any liens from the IRS.  Fact: If the tax lien is not secured, it will become a priority debt and it must be paid in a Chapter 13.  It is not dischargeable in a Chapter 7.  If the IRS has filed a secured claim, it cannot be discharged.

Most other types of taxes do not qualify for discharge if you file bankruptcy.  These include estate taxes, gift taxes, sales taxes or fuel taxes. 

Tax law is very complicated and sometimes there are exceptions to what can be discharged that are unique to the client.  Even if you cannot include you tax debt in your bankruptcy plan, getting relief from your other debts will help you pay your taxes.  You will not know what you can do about your tax debt until you consult with a bankruptcy attorney.  We have helped hundreds of clients determine how they can handle their tax debt.