Certain Tax Debts are Discharageable in Chapter 7 Bankruptcy
Typically, Chapter 13 Bankruptcy is the best bankruptcy for dealing with tax debts. However, Chapter 7 Bankruptcy can also discharge tax debts as well. It requires a very specific set of circumstances. These circumstances are as listed below:
- Income tax or Sales Tax. Only income tax or sales tax are dischargeable. Payroll taxes or fraudulent taxes and penalties, can never be discharged in bankruptcy.
- Three years old. The tax return you are seeking to discharge must have been originally due at least three years before you filed for bankruptcy. Further, the tax return was not tolled by an offer in compromise or a payment plan.
- The tax return was filed. Two years prior to filing for Chapter 7 Bankruptcy you filed the tax return you are seeking a discharge on.
- 240-day rule. The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.
Once Federal Taxes Become a Lien, You Cannot Discharge them in Chapter 7 Bankruptcy
Chapter 7 bankruptcy is terrible at dealing with secured debt. Once a Tax lien is filed by the IRS, it is secured by all of your possessions, regardless of any exemptions that your state may provide for you. Interestingly, it is the value of all of your assets that the lien will be valued at. The amount above and beyond that will be discharged.
Taxes in Chapter 13 Bankruptcy – Repaid or Discharged
In Chapter 13 Bankruptcy, most of your tax debt will be repaid. Some of your tax debt, the “non-priority” portion of the taxes will be discharged. This includes some interest and some penalties.
The repayment will be made through your monthly payment you make to the trustee. It will supersede any other agreements you may have had with the IRS.