Does Bankruptcy Erase Tax Debt?
Easing Your Financial Hardship

Does bankruptcy erase tax debt? Many people end up asking themselves this question because they find themselves stuck in a financial situation that seems impossible to overcome.

It should be noted here right up front that when you are dealing with the IRS and looking for top notch tax debt solutions, bankruptcy is not normally your best choice. Typically, money owed to the government via an IRS tax debt will be considered to be high priority debt which means it must be paid over other, less important debts. However, it is possible to clear IRS debts using bankruptcy under some circumstances.

A Chapter 7 bankruptcy has specific and sometimes complex criteria that may allow some debtors to clear an IRS tax debt as part of a bankruptcy filing. However there will be many other implications on your finances here that must be considered too.

Owing taxes to the federal government is one of the most unsettling financial positions you can find yourself in. Although bankruptcy may help you clear some kinds of tax debt, it will not clear a federal tax lien which has been attached to one or more of your assets. If no tax lien has been filed, income tax debt may be discharged and cleared from your record as long as certain requirements are met.

It is also possible for a bankruptcy proceeding to clear state and local income tax debt in addition to the federal debt. There are, of course, certain criteria that must be met when you are looking to erase your tax debt using bankruptcy whether it be federal, state, or local taxes.

Does Bankruptcy Erase Tax Debt—Rules Apply

In order to discharge a tax debt, you must follow some specific rules. For instance, your tax returns must have been due three years or more prior to filing the petition. The returns also must have been filed for more than two years before the petition. The taxes that you owe must have been assessed against you by the government for at least 240 days before a case a bankruptcy case can be filed. Obviously, these rules are in place to discourage debtors from using the bankruptcy courts strictly to wipe out tax debt.

Two other important criteria apply, your tax returns must be truthful and not fraudulent. Attempting to evade a tax bill by using bankruptcy may get you kicked out of bankruptcy court as well as land you in other legal hot water. As long as you meet the rules and are legitimately unable to pay it is likely the taxes will be discharged in bankruptcy. There are some technical rules that can complicate matters, but for the most part an honest and straightforward approach will get results.

If you are successful in getting your tax debt discharged through a Chapter 7 bankruptcy filing, the IRS will no longer be able to pursue the tax debt by seizing your bank account monies or through a wage garnishment of your paycheck.

Does Bankruptcy Erase Tax Debt—What About a Tax Lien?

If the IRS has successfully placed a tax lien on any of your property that lien will remain in place even through a bankruptcy court settlement. This means that the tax debtor will still be required to pay the tax liability out of any of the proceeds of the sale of whatever asset had the tax lien placed.

Everyone knows that the tax code is extremely complicated and ripe for cherry picking by expert tax lawyers. This leaves many people unwilling to proceed with a bankruptcy to pay off tax debt. Instead the best thing may be to contact a tax attorney who specializes in tax debt cases and has practiced before the IRS. You don't want to go through the process and expense of a bankruptcy only to find out that you don't qualify for tax debt relief.

You may also want to consider a consultation with a bankruptcy attorney who has specialized experience in dealing with federal tax debt. As always, check out the attorney's reputation by looking at the Better Business Bureau, your state's legal association, and any other reliable rating resource you can find.