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Many people struggling with debt assume that their tax debt is untouchable when they file for bankruptcy. But that’s not necessarily true. While some IRS debt can be discharged, it depends on the type of taxes you owe and your specific conditions. If you’re considering bankruptcy and have outstanding tax debt, understanding how the process works can help you make the best financial decision.
Can Bankruptcy Wipe Out Your IRS Debt?
Yes—but only in certain cases. Income tax debt is sometimes dischargeable in bankruptcy, while other types of tax debt, such as payroll taxes or fraud-related liabilities, generally are not. To qualify for discharge, your IRS debt must meet specific requirements under the “three-year, two-year, 240-day” rule:
- The tax return was due at least three years before filing bankruptcy.
- The return was filed at least two years before filing.
- The IRS assessed the tax debt at least 240 days before filing.
If your tax debt meets these three conditions—and you didn’t commit fraud or willfully evade your taxes—you may be able to discharge it.
Chapter 7 vs. Chapter 13 Bankruptcy: How They Handle Tax Debt
If your IRS debt qualifies under the rules above, Chapter 7 bankruptcy may allow you to completely erase it. However, if the debt doesn’t meet the criteria, you’ll still owe the full amount after bankruptcy.
If your tax debt isn’t dischargeable, Chapter 13 bankruptcy allows you to repay it over time under a court-approved plan. The benefit is that this plan may reduce penalties and stop the IRS’s collection efforts while you make payments.
The Automatic Stay: Immediate Relief from IRS Collection
When you file for bankruptcy, an automatic stay goes into effect, stopping the IRS’s collection efforts. This means:
- No more wage garnishments for unpaid taxes
- No more bank levies or property liens
- Temporary relief from IRS payment plans
However, in certain cases the IRS can request that the court lift the stay. That’s why it’s important to have a bankruptcy attorney guiding you through the process.
Tax Liens & Bankruptcy in Alabama
Even if your tax debt is dischargeable, it is likely that any IRS lien placed on your property before filing bankruptcy will remain. This means that although you won’t owe the IRS anymore, they still have a legal claim to your property. The best way to handle tax liens in bankruptcy depends on your specific case, which is why an attorney can help you uncover your best option.
Bankruptcy & Your Future Taxes
Discharging tax debt doesn’t give you a free pass on your future taxes. The IRS will still expect timely filings and payments after bankruptcy. If you don’t stay up-to-date (“current”) on your taxes, you could end up in financial trouble again.
Get Help with Your Tax Debt in Bankruptcy by Contacting an Attorney
If you’re overwhelmed by your tax debt, bankruptcy may offer a path to relief—but the process is complex. At Pleasant Legal Solutions, we help clients determine whether their tax debt is dischargeable and explore the best options for financial recovery. Contact us today to schedule a consultation.