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Bankruptcy and Tax Debt

August 7, 2014

If you have a tax debt and you want to make a new start, you might be able to take advantage of bankruptcy laws. However, if your tax liability is one of the major reasons for filing bankruptcy, you should first confirm that you can include it in the bankruptcy.

First, you’ll need to choose a bankruptcy plan for the discharge of debt. A discharge frees you from the personal liability of paying certain debts. Depending on what debts you owe, some may be dischargeable and some are not. Whether or not you can discharge your tax debt depends on the specifics of your case.

If you are filing for bankruptcy under Chapter 7, then you can get full discharge of allowable debts. If, on the other hand, you are filing under Chapter 13, then you repay some debts under a payment plan while the remaining debts are discharged.

The IRS has certain rules for the discharge of tax debts in Chapter 7 and Chapter 13 bankruptcy filings. These include:

  • The due date for filing a tax return was at least three years prior to filing bankruptcy.
  • The tax return was filed at least two years ago.
  • The tax assessment is at least 240 days old.
  • The tax return was not fraudulent and there was no attempted tax evasion.

If these basic criteria are met, then your tax debt may be eligible to be discharged under Chapter 7 or Chapter 13 bankruptcy. It is always advisable to consult with a tax professional before declaring bankruptcy to make sure your tax debt meets the IRS’ criteria.


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