Will bankruptcy erase tax debts?

| Jul 8, 2019 | chapter 7 | 0 comments

Whenever tax season rolls around again, it is natural for stress levels to rise. It is unfortunately common for individuals to fall behind on their tax payments, especially if they struggle to repay other loans or make other necessary payments. Recent changes in tax laws can make paying taxes even more difficult for some Kentuckians.

The IRS estimated in 2009 that nearly eight million Americans owed back taxes up to $10,000. This year, NBC reports that number might have jumped up to 30 million people who received a bill from the IRS instead of a refund. And those back payments incur several penalties and interest over time, which can make it even more challenging to escape tax debt.

Many people facing tax debt might wonder if bankruptcy could help them obtain a clean slate, but the answer is more complicated than they might think.

Tax debt: Is it dischargeable?

When reviewing which debts bankruptcy discharges, tax debts can fall on both sides of the spectrum of dischargeable or nondischargeable. They usually come with a caveat that states individuals can find relief from “some tax debts.”

It also depends on which chapter of bankruptcy individuals choose to file. Filing Chapter 13 will still require individuals to repay a portion of or all of their tax debts. Meanwhile, Chapter 7 often completely discharges some tax debts through liquidation.

It is a common bankruptcy myth that all tax debts are nondischargeable. However, obtaining that discharge can be a challenge.

You must meet specific conditions to discharge tax debt

Usually, individuals can only obtain a discharge for federal income tax debts they owe. Others, such as property or estate taxes, cannot be discharged. Even then, individuals must meet certain criteria to discharge their federal income tax debt.

Those conditions include:

  • They have not committed tax fraud or evaded taxes
  • They filed a tax return for this debt more than two years before filing bankruptcy
  • The taxes were originally due three years before the individual filed bankruptcy
  • The IRS assessed the tax debt 240 days before the individual filed bankruptcy

If individuals meet these criteria, then they can include their federal income tax debts in their bankruptcy filing. Tax debts are also a priority debt. Therefore, liquidated assets through Chapter 7 will pay off those debts before others to relieve individuals of the pressure and responsibility of repaying those debts.