Posted by Fred Lake

What Becomes of Your Tax Debt After Filing for Bankruptcy?

What Becomes of Your Tax Debt After Filing for Bankruptcy?


There are many forms of debt people might owe the IRS. It could be back taxes, unpaid taxes, or income taxes. Back tax is becoming a more significant issue as many people find themselves in unemployment.

Even if the debt is a few thousand dollars, Uncle Sam could make it feel like millions of dollars. This is due to the aggressive strategy the IRS adopts for collecting back taxes. Many taxpayers would want an end to this nightmare, and this is where chapter seven bankruptcy comes in.

Tax Debt: Bankruptcy and the Automatic Stay

Often, Uncle Sam would send you a notice of past taxes that are due. If you do not take any step, you get a letter every couple of months with an increasing threat level. In time, the notes will transform to a legal notice, involving filing a lien, wage garnishment, or freezing a bank account.

With the automatic stay, the IRS cannot contact, let alone harass you to collect their debts. The automatic stay kicks in on filing the voluntary petition, which bars the IRS from contacting you. This automatic stay also covers property. While many of your personal property is protected during chapter 7, the IRS cannot touch them.

The automatic stay is a pretty potent tool to keep individuals protected. While creditors cannot contact you, you can initiate a conversation with them, which happens on your terms.

Tax Debt Discharge in Chapter 7: A Timeline

These rules apply to the bankruptcy process also. There is a slight difference, however, for people with past-due taxes.

  • Filing: Your debt on the paperwork will be listed as a priority unsecured debt. This is Part 1 of Schedule E/F

  • Trustee Meeting: the trustee reviews the paperwork at the 341 in a bid to verify the debtor’s identity and request information on any discrepancy in the petition

  • Discharge: the court can discharge both secure and unsecured debts. There should be a notification of discharge on 60 days if your debts meet the above requirement.

In exceptional cases, the debtor must meet the extra qualification to discharge some debts. Cases involving student loans and tax liens make this possible. They must convince the court that they couldn't pay the debt because of undue hardship.

What Determines Whether Your Taxes Can Be Erased?

There are many rules with the IRS; hence to meet bankruptcy discharge, there are specific rules to meet. Should there be any rule not met, the IRS could object to the release. The primary bankruptcy discharge rule all hinges around time.

  • Income Taxes: Chapter 7 bankruptcy will discharge income taxes, which involves 1040 taxes. This, however, does not include trust funds and property taxes. With this, know the kind of taxes you owe so you will be convinced if chapter7 will get rid of it.

  • Must have filed tax returns for two years. If the taxpayer needs to file, his/her return must be on file for at least two years when filing for bankruptcy. Even if you file the return on time, the two years waiting period holds. Failure to file will make the IRS file substitute returns. This does not count as the taxpayer’s returns. 

  • Taxpayers Must have at least three years Tax Debt: this also involves the income tax debt that must be three years old. There are days that the tax date could be April 16th, 17th, or 18th and not necessarily 15th. Over time, there are cases when the IRS lawyers refuse a discharge due to one or two days discrepancy. With this, you risk starting over if you do not file your petition on the right date.

  • Your Tax Assessment is eight months or Less: if Uncle Sam has not examined your tax debt within the last 240 days, it cannot discharge income tax debt. Yet, there is no way one can know if the IRS has assessed the mortgage or not since this is an internal process. A general method of knowing that Uncle Sam hasn't evaluated the debt is if there is no bill revealing the amount's breakdown due.

What About My Tax Refund?

For people expecting a considerable refund, make sure to discuss it with your attorney. You might want to delay filing for bankruptcy till you get your tax year refund for the past year.



Fred Lake
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