Does Bankruptcy Clear Tax Debt?

Let’s make one thing perfectly clear about tax debt.

Everyone, no matter what type of debt they owe, has the right to file for bankruptcy. It doesn’t matter if it’s student loans, medical bills, credit card debt, or even tax debt. Bankruptcy is a constitutionally guaranteed right, codified in the earliest years of the United States of America. Yes, unpaid tax debt is a unique circumstance within a bankruptcy. However, a more detailed explanation is in order so that you can understand how tax debt functions within a bankruptcy filing.

How It Works in Chapter 13

The first thing to understand is that the automatic stay – protection from collection actions while in bankruptcy – works with both federal and state tax debt. What happens to that debt depends on the type of bankruptcy you file and your financial situation. The federal government is a creditor, just like any other when it comes to bankruptcy. If you are filing for Chapter 13, the courts will agree to a repayment plan which allows you to settle with your creditors and make payments over a term of years until the bankruptcy is discharged. When a bankruptcy is discharged, creditors agree that the debts are paid in full – and this includes the IRS. In this way, bankruptcy clears the tax debt.

There are, however, prerequisites to filing.

All tax returns must be filed for tax periods within a period of four years prior to your bankruptcy filing.
During the time when your bankruptcy petition is active, you must continue to file all required returns.
Current taxes must be paid as they come due.
Failing to file or pay taxes while in bankruptcy can result in your filing being dismissed.

How It Works in Chapter 7

When filing for a Chapter 7 bankruptcy, there is a means test to determine eligibility for liquidation bankruptcy. When it comes to discharging tax debt within Chapter 7, there is also a test for eligibility.

You have not committed tax fraud or try to evade taxes.
The debt was assessed by the IRS at least 240 days prior to your filing.
The debt is a minimum of three years old.
The tax debt was accrued on income.
A legitimate, complete, and truthful tax return was filed in the two years prior to the bankruptcy filing.

When all of these criteria have been met, the tax debt is discharged and that includes penalties and interest that have been generated over time.

What About Other Tax Debts?

Other taxes, such as payroll taxes, are not discharged in bankruptcy, nor will any penalties on these taxes be forgiven. Likewise, federal tax liens remain in place unless you clear the liens upon exiting bankruptcy. Until then, the liens will remain in place and should the property sell, the IRS will take their cut. It is very important during bankruptcy to keep track of any tax liens against any properties you might have. Social Security taxes must be paid, and cannot be discharged.

What About My Refund?

You may still receive tax refunds even if you are in an active bankruptcy. However, these refunds may be delayed or offset to pay down tax debt. If this violates the automatic stay, then you will need to file a claim against the IRS for relief and damages. You may also seek attorney’s fees for your expenses incurred by the violation of the automatic stay or discharge injunction.

Why You Need an Experienced Bankruptcy Attorney

If reading all that government boilerplate made your eyes spin, then you have a good idea of what it would feel like to try and handle your bankruptcy on your own. Even with the bankruptcy preparer, you can’t get the legal advice you need for a satisfactory filing and then discharge. Only an attorney can offer legal advice, and bankruptcy is considered as much a specialty as tax law. In this case, the two go hand in hand. Bankruptcies, especially Chapter 13, can be complex. Even a “simple” Chapter 7 has a great many prerequisites and eligibility hurdles for you to jump.

Other Debts that Live On

There are other debts that cannot be discharged in bankruptcy and you should take into account that you will be obligated to pay them.

Homeowners association and condominium board fees.
Child or spousal support and subsequent attorney fees.
Student loans may be discharged under special circumstances.
Fines or penalties that are due to government agencies.
Debts arising from criminal conduct including restitution to victims, court fines, and penalties.
Debts not listed on the bankruptcy petition.
Debts that were obtained fraudulently.

Bankruptcy was never intended to wipe out all debts, especially those incurred by willful, malicious, and criminal behavior.

Can the Bankruptcy Court Deny a Petition?

Yes. Bankruptcy filings are not frivolous procedures, and the court can and will deny a petition if the debtor does not comply with rules and procedures. Federal judges – and bankruptcy is a federal jurisdiction – take a dim view of perjury, failure to account for assets, hiding or destroying records, or hiding property with the intent to defraud one’s creditors. Even if your debts are dischargeable, the judge may decide to deny the petition. The US trustee, the bankruptcy trustee, and your creditors may also object which will cause the judge to consider denying a discharge.

Call Us and Get Real Help

Van Horn Law Group has a decade of experience in helping to engineer positive outcomes with all sorts of debt issues including but not limited to bankruptcy. Our experienced staff and attorneys will have your back from the day you walk in the office door until the day you walk out of bankruptcy court with the successful discharge. We understand the many factors that lead people into debt and into filing bankruptcy. We are here to help with offices in West Palm Beach and in Fort Lauderdale, open Monday through Saturday. We welcome walk-ins and will even open on Sunday if you have an appointment with us. Get the help you need to leave your debts behind and get a fresh start.