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How Is Tax Debt Treated in Bankruptcy?

How Is Tax Debt Treated in Bankruptcy?

Some tax debts may be dischargeable in either a Chapter 7 or Chapter 13 bankruptcy. There are many criteria that must be satisfied and complex rules that apply to the dischargeability of tax debt.

The Automatic Stay

First, the automatic stay of bankruptcy will protect you from collection actions, including IRS collection actions. Your assets won’t be levied. If your wages were being garnished, the IRS will have to pause the garnishment.

A Chapter 7 case can proceed fairly quickly, while a Chapter 13 plan can take several years. Until the bankruptcy is complete, the IRS can’t take enforced collection actions.

However, the IRS can resume collection activity on any tax debt that survives the bankruptcy. The statute of limitations on collection will also be paused during the automatic stay.

Tax Debts in Chapter 7

Tax debts may be dischargeable in a Chapter 7 case if the following conditions are met:

  • The tax is for a return due at least three years ago.
  • The tax return was actually filed at least two years ago.
  • The tax was actually assessed at least 240 days ago.
  • The tax is unsecured.
  • The taxpayer didn’t commit tax fraud or tax evasion in relation to the tax.

Many other aspects of your Chapter 7 case also come into play, including the amount of exempt and non-exempt assets have. If your most concerning debt is IRS or state tax debt, you should consult a tax resolution attorney before pursuing your bankruptcy case.

One issue to pay careful attention to is the IRS federal tax lien. If the IRS has filed a Notice of Federal Tax Lien with the proper authorities and you have some property that is exempt from the Chapter 7 liquidation, the IRS may still have a right to seize these assets due to the lien. This is a special power that most creditors don’t have.

Tax Debts in Chapter 13

Chapter 13 involves a three to five year payment plan. Bankruptcy debtors must pay back all priority creditors in full in Chapter 13, but may pay less than full value to nonpriority creditors.

Tax debt may be considered a nonpriority debt if the tax return was due at least three years ago, you filed the return at least two years ago, and the tax debt was assessed at least 240 days ago.

The amount you’ll pay to nonpriority creditors will depend on many factors, including your income, expenses, other debts, and assets.

Bankruptcy does have a lasting impact on your credit. Consider an IRS installment agreement, Offer in Compromise, or another tax resolution strategy to fix your tax problems while avoiding a bankruptcy.

The Gartzman Law Firm can find the best tax resolution option for your situation. Use our contact form to request a consultation with an Atlanta tax resolution attorney.