How Tax Debt Is Handled In Bankruptcy

Posted on: 9 March 2016

If you are having a difficult time paying your bills and catching up on tax debts you owe the IRS, filing for bankruptcy might offer you some relief. Chapter 7 bankruptcy and Chapter 13 bankruptcy can both offer relief for tax debt in some cases, but it will depend on the conditions of the tax debt you owe and on your personal situation. Here are several things you should know about bankruptcy, tax debt, and the way debts are classified in bankruptcy.

The Difference Between Priority Debt and Nonpriority Debt

The first thing you should understand about debts in bankruptcy is that each debt you owe will be classified as either a priority debt or a nonpriority debt. A priority debt is a debt you cannot get out of repaying, no matter which type of bankruptcy you use. You will have to repay the debt in full, and priority debts can sometimes include tax debts. Priority debts take precedence over all other types of debts. Other debts that are also typically considered priority debts are the following:

  • Child support
  • Property taxes
  • Liens on your assets
  • Alimony

A nonpriority debt is a debt that you might not have to repay in full, and these debts primarily consist of unsecured debts such as credit card bills and medical bills. It is easier to get through bankruptcy without repaying these types of debts in full, and tax debt can sometimes be considered a nonpriority debt.

How Chapter 7 Bankruptcy Handles Tax Debts

When you file Chapter 7 bankruptcy, you will most likely have the ability to have all your unsecured nonpriority debts wiped away. If this is done, you will no longer owe any of these bills. If you owe back taxes, you may also be able to get this debt wiped out as long as the debt is considered a nonpriority debt. To determine this, the debt must meet the following conditions:

  • It must be for a return that is at least three years old.
  • The return had to be filed at least two years ago.
  • The IRS must have assessed the tax debt at least 240 days ago.
  • You must have been honest on your tax returns.

If your tax debt meets these conditions, your bankruptcy may wipe out the tax debt in full.

How Chapter 13 Bankruptcy Handles Tax Debts

The same conditions apply for Chapter 13 bankruptcy when it comes to determining whether a tax debt is a priority debt or a nonpriority debt. If you meet the conditions listed above, the tax debt will be considered a nonpriority debt in Chapter 13 bankruptcy. In this situation, you will be able to settle your full tax bill by paying only a portion of the debt. This will be completed by making payments to the trustee over the life of your plan, which typically lasts for three to five years.

If you do not meet the conditions listed above, the tax debt will be considered a priority debt. This means you will be required to repay the full amount you owe during your repayment plan. While this will not allow you to pay less than what you owe, there is a benefit of using Chapter 13 to get caught up on tax debts. The benefit is that it will allow you to repay the full debt over a period of time, which will be the length of your repayment plan set up by the trustee. During this time, the IRS will not be able to contact you or bother you for the money you owe.

If you are interested in learning more about both types of bankruptcies and how they could help you eliminate your tax debt, contact a bankruptcy attorney in your area today.


Talking About Bankruptcy Attorney Services

Hi there, my name is Mac Deeland. Welcome to my site about bankruptcy attorneys. Bankruptcy saved me from having to pay nearly all of my monthly income to my growing debts. Due to high interest rates and huge credit balances, I was barely able to pay off the monthly interest alone with my income. Even working three jobs did not help me dig my way out of the hole I created. Luckily, I was able to work with a bankruptcy attorney to clear up my debts and start anew. I will use this site to help others take the same path of debt forgiveness by working with a bankruptcy attorney.