None of us want to file bankruptcy, but life happens. During the last several years, bankruptcy filings have reached an all-time high. Consumer debt and tax problems usually go hand in hand. The loss of a job, unexpected illness, a bad investment or divorce can bring down the house of cards. Filing bankruptcy can bring welcome relief and a fresh start. But what about tax debt? Is that dischargeable too?
While you can get relief from filing bankruptcy, there are several caveats. Tax debt in some instances can be discharged, though it depends on what type of bankruptcy you file. Some income taxes can be discharged in a Chapter 7 proceeding. However only income tax can be discharged, it does not discharge payroll taxes for instance. If you file a Chapter 13, you will need to repay at least some portion of your taxes and other debt through a court supervised repayment plan.Chapter 7
Chapter 7 is by far the most commonly filed type of bankruptcy. With this type, the debtor is required to sell any non-exempt assets to the bankruptcy trustee. Under normal circumstances, most assets fall into one of many exemptions however. The trustee will distribute any money to your creditors. Most of the remaining debt is discharged.
There are debts that are considered non-dischargeable. This includes things like student loans, child support and alimony, debts incurred by fraud, personal injury court judgments, and some tax debt.
If you choose to file a Chapter 7, your tax debt could be discharged depending on four factors:
Deciding whether a tax debt can be discharged is tricky. If you have a tax problem and are contemplating bankruptcy, it's important to speak with a lawyer first. There are many options that can help you find a solution and get you the fresh financial start you deserve.