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Can bankruptcy wipe out tax debts?

On Behalf of | Aug 15, 2022 | Bankruptcy

Some people believe it’s possible to discharge tax debt by filing bankruptcy. While taxes may be discharged, you must meet specific requirements. 

Sometimes, income tax debts are eligible for discharge by filing Chapter 7 or 13 bankruptcy. It depends on how old the debts are and other criteria. 

How each type of bankruptcy impacts tax debts

In most cases, tax debts are classified as priority debts. This means they are paid first if assets are liquidated in a Chapter 7 filing and have to be paid in full with your Chapter 13 payment plan. 

It’s possible to receive a tax refund when under bankruptcy protection, but these will likely be directed to cover your existing tax debt. 

Rules related to discharging tax debt

For tax debts to be discharged, you must meet other criteria, too, which include:

  • The due date to file the tax return was a minimum of three years ago
  • The tax return was filed a minimum of two years ago
  • The tax assessment is a minimum of 240 days old
  • No fraud was involved with the tax return

You aren’t guilty of tax evasion 

You need to consider these criteria for each year’s tax debt so you can determine if the unpaid balance for the tax year can be discharged using bankruptcy. Sometimes, some of your tax debt is eligible, while other parts of the debt are not.

Understanding bankruptcy and tax debt

As you can see, there are some situations when it’s possible to discharge tax debt by filing bankruptcy. Knowing your legal options will help you understand what type of debt you can eliminate by filing bankruptcy.