Adam Law Group Blog

Discharging Tax Debt in Chapter 7 Bankruptcy

 

For individuals who are facing financial difficulties, Chapter 7 bankruptcy is often the best option to remove debt and obtain a second chance at a strong credit score. Chapter 7 is frequently chosen by individuals who have a large amount of debt and little income to pay it off. Unfortunately, there are some types of debts that are not able to be discharged in Chapter 7, including student loans and income taxes. Even though income taxes are often not dischargeable in Chapter 7 bankruptcy, a debtor can sometimes discharge income taxes in bankruptcy if the amount owed is an income tax rather than payroll taxes like Social Security or Medicare.

The 240-Day Rule

Taxes must have been assessed by the Internal Revenue Service at least 240 days before a person files for bankruptcy. The date at which taxes are assessed is often the date that the Internal Revenue Service receives and processes a tax return. If the Internal Revenue Service audits a return later and assesses that a different amount is owed, a person must wait at least 240 days to file a return. In some cases, the time period requirement can be suspended.

The Two-Year Rule

This window of time applies to when a person files an income tax return. A tax return must be filed at least two years before filing for Chapter 7 bankruptcy even if a person files a tax return late so tax debts can be discharged.

The Three-Year Rule

Taxes must be discharged at least three years before a person files for bankruptcy. For many people, income taxes are due on April 15, but there are some exceptions. To be eligible to discharge back taxes, a person must have filed for bankruptcy after April 15, 2018.

Discharging Income Taxes with Chapter 13 Bankruptcy

If a person does not file for Chapter 7 bankruptcy, it might be possible to pursue the option of Chapter 13 bankruptcy to discharge at least some of a person’s income tax debt. The terms of Chapter 13 bankruptcy allow a person to pay back debts over a period of three to five years according to a monthly payment plan. If an individual satisfies the 240-day rule, two-year rule, and three-year rule, tax debt is capable of being listed as a non-priority debt, which means that a person will not be required to pay back the debt. If a tax debt is more recent or does not meet the requirement, the amount is reclassified as a priority debt and must be fully repaid.

The Dischargeability of Tax Liens

If a person owes a substantial tax debt, it is possible that a taxing authority files a lien on property to turn the amount into a secured debt. After a tax debt becomes a tax lien, the amount cannot be discharged no matter the type of bankruptcy that a person files.

Speak with an Experienced Bankruptcy Attorney

At the Adam Law Group, we have substantial experience helping people navigate the complex issues associated with bankruptcy. We can review the facts of your case and help you determine the best possible option to proceed. Contact our law office to schedule an initial free case evaluation.