You’re looking at a tax bill wondering if you can get rid of it in bankruptcy. Well, can you? In most cases, the answer is no. Tax debt is generally considered a “nondischargeable debt,” meaning that it doesn’t go away in bankruptcy. While exceptions do exist, wiping out taxes is tough because you must first meet complicated criteria.
You might be able to discharge your tax debt, or at least make it more manageable, depending on the type of bankruptcy you file. Here are the two most common types of bankruptcy:
Chapter 7. Filing for Chapter 7 bankruptcy quickly gets rid of all of your dischargeable debts—such as unsecured credit card bills, personal loans, and medical bills—without requiring you to complete a lengthy repayment plan. To qualify for Chapter 7, your income must fall below a certain threshold set by your state.
Chapter 13. Chapter 13 helps by allowing you to spread out debt over a three or five-year payment plan. Any remaining dischargeable debt is wiped out once you successfully make all payments.
Getting Rid of Income Taxes in Chapter 7
Discharging your income tax debt in Chapter 7 doesn’t happen every day, but it is possible. For example, one way to win the tax-discharge lottery is to meet the following criteria:
- You must have filed your tax return on time.
- Your tax return must be accurate. If the taxing agency finds an error after the fact, you will be disqualified from seeking a discharge.
- You must time the bankruptcy correctly. For example, you must wait to file for bankruptcy more than three years after your taxes were originally due.
Bankruptcy and tax law are complex areas. It’s a good idea to explore your tax options with a knowledgeable attorney (and possibly an accountant) as soon as possible.
Paying Off Your Income Taxes in Chapter 13
If you can’t get rid of your tax debt by filing for Chapter 7, get used to the idea that you’re stuck paying your entire tax bill (unless you do an offer in compromise asking for a reduction). While Chapter 13 can help, its power is limited to easing the sticker shock of a large monthly payment.
For example, if you can’t negotiate a payment plan with the taxing agency or if you’ve already messed up your existing payment plan, you have another option. By filing for Chapter 13, you can force the taxing agency to accept payments. The catch is that you’re required to pay the entire amount you owe over either a three or five year payment plan, depending on your other debts, your income, and the amount of property you’re keeping. So while there is a chance your monthly payment will be reasonable, it could still be higher than what you can afford, especially if you have a particularly large tax bill.
To find out more, see How Can Chapter 13 Help Me With My Nondischargeable Debts?
Questions for Your Attorney
- Are any of my tax debts dischargeable if I file a Chapter 7 bankruptcy?
- What happens if I try to pay my tax debt in a Chapter 13 payment plan but I can’t complete it?
- Someone told me that a “Chapter 20” might be a good idea if I have a lot of credit card and tax debt—what is this and would it work for me? Is it allowed in my court jurisdiction?