A Guide to Understanding Tax Debt and Bankruptcy

Financial pressure mounts rapidly for people who owe substantial amounts of taxes and back taxes. People often ask, does filing for tax debt bankruptcy give you real relief? Does bankruptcy discharge back taxes? Is Chapter 7 or Chapter 13 Bankruptcy the Best Approach? In this guide, these important questions will be addressed to help you better understand all matters related to tax debt and bankruptcy.

A major misconception is that filing for bankruptcy on taxes does not work, and that taxes are never discharged. Actually, that is not the case. When a specific set of criteria is met, filing for tax debt bankruptcy actually works, meaning you can successfully discharge those taxes.

However, in most cases, only income tax can be discharged, not other IRS tax debts such as payroll taxes or penalties. Of course, there are always specific conditions, circumstances, etc. that must be met and, in many cases, there are exceptions to the rules.

The conditions that must be met include a number of issues, but the most important is that there has been no fraud or tax evasion and that a tax return has been filed. Back taxes owed must also be at least three years old. This makes filing for bankruptcy difficult for people, and is one of the main reasons paying tax debt doesn’t work for many people.

When the appropriate conditions are met, the taxes can be discharged. Even if they cannot be discharged under the circumstances, filing for bankruptcy can still provide you with substantial relief. The good news is, yes, bankruptcy can still help provide significant financial relief depending on your circumstances.

For example, if you file for chapter 13 bankruptcy, taxes that are not eligible for discharge can be repaid with interest and penalties over a period of up to 60 months. Chapter 13 creates a single monthly payment plan, giving you something more manageable and allowing you time with a realistic approach to paying off debts and getting back on track. Otherwise, by filing for Chapter 7 bankruptcy, you will at least be able to free yourself from other debts you may have, allowing you to pay your taxes more easily.

Of course, it is always important to consult with an experienced bankruptcy attorney before deciding to file, or looking at other potential alternatives and workable solutions. As mentioned, there are many different conditions and circumstances that may apply, and you’ll want to carefully consider your entire financial picture before going ahead with tax debt and filing for bankruptcy.