Does bankruptcy clear tax debt?

Financial struggles can feel overwhelming, especially if you're trying to juggle multiple issues, like mounting tax debt coupled with delinquent credit card bills or unpaid loans. Still, millions of Americans find themselves in this difficult position at some point or another, with many wondering if bankruptcy might offer a way out of their tax-related financial troubles. While bankruptcy can provide relief from many types of debt, its relationship with tax debt is more complex than most people realize.

The intersection of bankruptcy and tax debt involves intricate legal requirements and timing considerations that can significantly impact your ability to discharge your tax obligations. Understanding these nuances is crucial for making informed decisions about your financial future. After all, the rules surrounding tax debt discharge in bankruptcy are specific and strict, and what might work for credit card debt or medical bills won't necessarily apply to money owed to the Internal Revenue Service (IRS).

So, if you're considering bankruptcy as a solution for tax debt, you need to be clear on what types of debts can and cannot be eliminated through this process. 

Speak to a tax relief expert about your delinquent tax debt today.

Does bankruptcy clear tax debt?

When it comes to the question of whether bankruptcy will clear your tax debt, the short answer is: sometimes. Whether bankruptcy can clear your tax debt depends on several factors, including the type of bankruptcy you file, the age of the tax debt and the nature of the taxes owed. There are also two main types of bankruptcy for individuals — Chapter 7 and Chapter 13 — and each differs in terms of how it addresses your tax debt. 

Chapter 7 bankruptcy, often called "liquidation bankruptcy," can discharge certain income tax debts if they meet all of these requirements:

• The tax debt is at least three years old from the date the tax return was due
• You filed the tax return at least two years before filing for bankruptcy
• The IRS assessed the tax at least 240 days before your bankruptcy filing
• The tax return was not fraudulent
• You haven't attempted to evade paying taxes

Chapter 13 bankruptcy works a bit differently. Rather than immediately discharging debt, it creates a three- to five-year repayment plan. Certain tax debts that don't qualify for discharge under Chapter 7 might be included in a Chapter 13 payment plan, but priority tax debts (generally those less than three years old) must be paid in full through the plan.

Certain types of tax debt can never be discharged through bankruptcy, including:

• Trust fund taxes, such as collected payroll taxes
• Tax liens recorded before your bankruptcy filing
• Penalties on non-dischargeable taxes

Find out what tax relief options are available to you now.

Other ways to get rid of your tax debt

Before pursuing bankruptcy, it may benefit you to explore other options for managing your tax debt. The IRS and most state tax agencies offer several programs designed to help taxpayers resolve their tax obligations, including:

• An Offer in Compromise (OIC): An OIC allows you to settle your tax debt for less than the full amount owed. Working with a tax relief service can be particularly helpful here, as they understand how to structure these offers for the highest chance of acceptance. These services can analyze your financial situation, determine a reasonable offer amount and handle negotiations with the IRS on your behalf.
• Installment agreement: An installment agreement with the IRS is another option worth weighing. You can set this up with the IRS directly, or a tax relief service can help you establish a monthly payment plan that fits your budget while ensuring compliance with IRS requirements. They may also be able to negotiate more favorable terms than you might secure on your own, potentially including lower monthly payments or reduced penalties.
• Penalty abatement: The IRS may waive certain penalties if you can demonstrate reasonable cause for your tax compliance issues. You can apply for this directly, but a professional tax relief service can also help document your case effectively, potentially saving you thousands in penalties while preserving your ability to pay the underlying tax debt.

The bottom line

While bankruptcy can provide relief from certain tax debts, the decision to file for bankruptcy shouldn't be made lightly, as it can have long-lasting implications for your credit and financial future. Before making any decisions, consider consulting with both a tax relief service and a bankruptcy attorney to understand your options fully. The tax relief service can help you explore alternatives like offers in compromise or installment agreements, while a bankruptcy attorney can evaluate whether your tax debts would be dischargeable in bankruptcy.