Bankruptcy and Tax Debt 

Each year, hundreds of thousands of Americans file bankruptcy.  Mounting debts become too much for filers to handle on their own.  Therefore, declaring bankruptcy is one of the debt relief answers. Plus, some of the debts that cause people to file, like credit cards and medical bills, are usually discharged in bankruptcy without question.

Tax Debt Dischargeability Requirements

• Due for 3 years-  For tax debt to be dischargeable, the first requirement it must meet is that it has been due for at least 3 years. This means each year on April 15, a new year of tax debts potentially becomes eligible for bankruptcy discharge. This year, 2020, tax debts from 2017 became potentially eligible for discharge.

• Filed for 2 years–  The second requirement that tax debt must meet to be dischargeable is that is must have been filed for at least 2 years. If you filed your taxes late, (whether or not you applied for an extension), these debts may be ineligible for discharge.  Even though, only due for at least 3 years.

• Assessed for 240 days-  Your tax return will be assessed to determine if you owe any additional taxes. Your debts must have been discharged at least 240 days ago to be dischargeable.

• No Fraud-  If any fraud is found in your tax returns, those years will not be dischargeable.  Thus, you should make sure that a tax professional takes a look at your tax returns in questions.  With the goal being to discharge as much of your tax debt as possible in a bankruptcy filing.  It is better to be cautious and assure there is no improprieties or fraud.

What to Do if Your Tax Debts Aren’t Dischargeable in Bankruptcy

While your debts may not be dischargeable in a Chapter 7, you can file Chapter 13 and pay your tax debts during your 3-5 year reorganized payment plan. You will be protected from garnishment on your tax debts while your bankruptcy is active. You may include more recent tax debts if you are paying them off through a Chapter 13. Some that file do so for the convenience of paying tax debts, arrearages, and unsecured debts consolidated into one payment.

How to Begin the Process of Discharging Tax Debt Through Bankruptcy

Your first step in filing bankruptcy should be consulting with at least one bankruptcy attorney, whether or not you decide to file your case with an attorney. Keep in mind that the success rate for represented filers it much higher than those who file pro se, or on their own. This is especially true in Chapter 13 Bankruptcy- the discharge rate for unrepresented filers is less than 1%. Additionally, the attorney should be able to help you decide which Chapter of Bankruptcy to file, what documents will be necessary for the preparation of  your petition, etc.

Hiring a Qualified Debt Attorney

After Your Petition is Filed

Once the petition has been filed, the filer must comply with all requests from their Bankruptcy Trustee. Approximately 30-45 days after the petition is filed, the debtor will attend a 341 Meeting of Creditors. The filer must take a second credit counseling course within 60 days of the 341 Hearing. In a Chapter 7, the case will be eligible for discharge at this point, and the filer will no longer be liable for their tax debts. Chapter 13 filers must complete their payment plan prior to discharge. Whereas a Chapter 13 bankruptcy payment plan lasts 3-5 years.