Are Taxes Dischargeable In Bankruptcy?by Mitchell Sussman (Mitchell Reed Sussman & Assoc. )
One of the most frequently asked questions by consumers who are contemplating filing bankruptcy is: “Are Taxes Due the IRS Dischargeable in Bankruptcy?” If you are eligible to file a Chapter 7 bankruptcy, virtually all of the debt that you owe will be discharged. A discharge of debt obtained in bankruptcy means that you do not have to pay the debt. It is one of the principal reasons for filing a Chapter 7 bankruptcy.
Whether you are eligible to file a Chapter 7 depends on whether you can pass the “means test.” A ” means test” separates those people with the financial means to repay their debts, from those who do not have the means. If you do qualify under the means test you will be able to file a Chapter 7 and wipe out your debt.
There are exceptions to the general rule that all debts will be wiped out by a Chapter 7 bankruptcy. Some of the more frequently seen exceptions are support payments to spouses and children, debts incurred by fraudulent or tortuous activity and most tax debts.
Therefore, contrary to the television and radio commercials that you may have heard offering hope by eliminating tax debt in bankruptcy, most tax debts cannot be wiped out in bankruptcy — you’ll continue to owe them whether you file a Chapter 7 or Chapter 13. As it is often said, two things that you can’t avoid are death and taxes.
There are, however, a very small category of tax debts that can be discharged in bankruptcy.
Under the current bankruptcy code, you are able to discharge or wipe out your tax debt if all of the following conditions are met:
(1) the taxes due are for non – payment of income tax. Taxes such as payroll tax or fraud penalties can never be wiped out.
(2) The income tax debt is more than three years old.
(3) You must have filed a return.
(4) The return must have been filed at least two years before you file for bankruptcy.
(5) Your return must have been truthful and not fraudulent.
(6) The income tax debt must have been assessed by the IRS at least 240 days prior to your bankruptcy filing.
If your taxes qualify for discharge in a Chapter 7 be aware, however, that while a Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt and prevent the IRS from going after your bank account or wages, if the IRS recorded a tax lien on your property before you filed bankruptcy, the lien will remain on the property. In effect, this means you’ll have to pay off the tax lien in order to sell the property regardless of whether or not you filed a Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, which is a debt repayment plan over time, you will be able to get relief from any action being taken by the IRS to collect taxes. Like a Chapter 7 a Chapter 13 filing invokes an automatic stay of any creditor collection activity, including an IRS levy.
In Chapter 13, however, while you may get temporary relief, you will have to agree to pay your tax debt over time as part of your Chapter 13 plan. Should you fall behind on your agreed upon plan payments, including payments to the IRS, it will likely result in the dismissal of your case. So it is important, that if you file a Chapter 13 plan with the goal of postponing your taxes, that whatever plan you propose that you stick with it during the term of the plan.
In the end, the answer to whether or not your taxes can be discharged in bankruptcy is not black and white. It is a definite color of gray and requires an experienced bankruptcy attorney to help you through.