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Can I Discharge Income Tax Debt With Bankruptcy?

With tax day fast approaching, many folks are understandably concerned about their finances. In fact, one of the most common questions we get asked around this time of year is whether income taxes can be wiped out with bankruptcy. The short answer is that it depends.

Federal and state income tax debt can indeed be discharged in either a Chapter 7 or Chapter 13 bankruptcy plan, if it meets certain criteria.

In general, older debts are more likely to be dischargeable. Bankruptcy can’t get you out of paying this year’s taxes – or eliminate last year’s tax debt. However, if your income tax debt was due more than three years ago – in 2009 for instance – it would be eligible for discharge, if you filed you return on time for that year (all the more reason to always file your taxes or request your extension by April 15!).  Is Chapter 7 right for you?

In addition to meeting the timeframe, the tax debt must 1) have been assessed by the IRS a minimum of 240 days prior to the bankruptcy filing 2) not contain misleading or fraudulent information and 3) not belong to someone guilty of tax evasion.

If those criteria are met, it should be possible to eliminate tax debt through either a Chapter 7 bankruptcy or Chapter 13 bankruptcy plan. In Chapter 7, qualified tax debt is treated similarly to all other debts and is eligible for complete discharge, sometimes in as little as several months.

Chapter 13 works a bit differently. Under a Chapter 13 plan, an agreed-upon portion of all your unsecured debt – including tax debt - is paid back in a monthly installment, which is distributed to creditors (and in the case of tax debt, the IRS).  The good news is that you’ll typically pay much less to the IRS under Chapter 13 bankruptcy than you would with a standard IRS Installment Agreement.

If you can’t afford to pay past taxes, the worst thing you can do is to ignore the problem. Tax debt doesn’t go away on it’s own – instead, it grows. The longer you wait, the faster IRS interest, fees and fines multiply and further damage your finances and your credit.

Filing for bankruptcy can help you break free from tax debt, even if your debt isn’t old enough to qualify for discharge. How? By wiping out other debts that are interfering with your ability to pay taxes – like credit card debt, medical bills, car loans and more.

If you’re considering bankruptcy for tax debt, consider speaking with one of our experienced bankruptcy attorneys. We’ll help you figure out if and when bankruptcy is right for you.  Contact us today to sign up for your free one-on-one personal debt evaluation and take the first steps down the path to financial freedom.

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