Tax Debt and Your Bankruptcy

Did you know that some debts aren’t eligible for bankruptcy, while others may be eligible but receive special treatment? While it is true that tax debts fit into one of these two categories they can actually be part of both categories, just not at the same time. In other words, there are times when tax debt may be eligible for bankruptcy and receive priority treatment while other times they are not eligible at all.

Some Tax Debt Can Be Discharged

Let’s consider the situation in which your tax debt is eligible for bankruptcy. Tax debt is only eligible for a bankruptcy discharge if  the debt is:

(1)    The taxes are income taxes.

(2)    The taxes were not accrued fraudulently and/or there was no attempt to evade payment.

(3)    A tax return was filed for the debt seeking to be discharged.

(4)    The debt is at least three years old from the time of filing for bankruptcy.

(5)    The income tax debt has been assessed by the IRS at least 240 days prior to filing for bankruptcy.

Further, these debts will only be allowed to be discharged through a Chapter 13 bankruptcy. This is because tax debts are considered priority debts, meaning they get repaid first before any other creditor. So if you were to file for bankruptcy carrying tax debt, a car loan and a few credit cards, all of your Chapter 13 payment funds would go towards paying off the tax debt first, followed by the secured car loan any remaining funds would then go towards the credit cards. In most situations, there is very  little funds, if any, remaining for credit cards which is why you may have heard talk of them being eliminated with no cost.

It is important to speak to your Fort Worth bankruptcy lawyer about your tax debts and whether you will be able to resolve those through bankruptcy.