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Can bankruptcy lead to a discharge of income tax debts?

On Behalf of | Jan 26, 2024 | Bankruptcy

Those considering a personal bankruptcy filing may have a variety of different financial obligations complicating their household budgets. Medical debts and credit card balances are often the driving force behind a personal bankruptcy filing.

However, people accrue many different types of debt that can leave them struggling financially. Income tax debt is sometimes a concern. Individuals who make mistakes on their income tax returns may discover that they have underpaid their tax obligations and now have an outstanding tax debt owed to the Internal Revenue Service (IRS). In addition to what they didn’t pay, they may be subject to interest and penalties.

Income tax debts put people at risk of wage garnishment and property liens. They can feel like an insurmountable financial challenge in some cases. Can a personal bankruptcy filing help those with large amounts of income tax debt?

Some tax debts are dischargeable

As a general rule, income tax debts are difficult to include in a personal bankruptcy filing. However, in some scenarios, individuals can discharge a portion of their income tax debts. The IRS has very specific rules regarding the former and future conduct of those hoping to discharge tax debt as part of a bankruptcy filing.

In general, only older tax debts are eligible for discharge. Someone who successfully completes a Chapter 7 bankruptcy and includes income tax debts in their filing could eliminate some of their income tax obligations. Provided that the individual filed their income tax returns on time previously, tax debts that are more than three years old may be eligible for discharge at the end of a Chapter 7 bankruptcy.

Those with more recent texts may want to consider a Chapter 13 bankruptcy. They can make payments to the IRS as part of their repayment plan. If they secure a discharge by completing their repayment plan, the debts included in the plan and any income tax debts that are more than three years old may be eligible for discharge.

Those who eliminate at least some of their income tax debts may have an easier time meeting their future financial obligations and balancing their household budgets. Learning about the rules that apply to different types of debt may benefit those unable to meet all of their financial responsibilities now and moving forward.