Can Filing for Bankruptcy Eliminate Your Tax Debt?

Individuals file for bankruptcy relief for a variety of reasons. One of those reasons may include tax debt that the person cannot afford to pay.  However, will filing bankruptcy eliminate your tax debt? The answer depends on the type of tax debt and the age of the tax debt. In most cases, old personal income taxes can be wiped out if you meet certain criteria. A Wisconsin bankruptcy attorney can review your tax debt to tell you if you can get rid of tax debt by filing bankruptcy.

Examining Whether Tax Debt Meets Criteria for a Discharge

In most cases, individuals cannot discharge personal tax debt through a Chapter 7 bankruptcy. Tax debt is considered a priority unsecured debt, meaning you must pay this debt even though you file a Chapter 7 bankruptcy case. However, if the tax debt meets three specific criteria, you may get rid of the tax debt in Chapter 7 without paying any money to the IRS.

You must meet all three requirements for your tax debt to be eligible for a bankruptcy discharge in Chapter 7. The three requirements are commonly referred to as the 3-2-240 Rule by bankruptcy lawyers.

  1.     Your tax debt must be a minimum of three years old at the time you file your Chapter 7 bankruptcy petition; AND,
  2.     The tax returns which resulted in the tax liability must be filed a minimum of two years prior to the filing of your bankruptcy case; AND,
  3.     All old tax debts that you wish to eliminate must have been assessed by the IRS a minimum of 240 days before the filing date of your Chapter 7 petition.

If your situation meets all three of the above criteria, you might be able to eliminate the tax debt in your Chapter 7 bankruptcy case. However, you must be careful when calculating the dates because there could be exceptions that apply in your case. For instance, if you file your tax return late or you request an extension to file your tax return, these situations could change the beginning date used to calculate each date.

It is usually best to consult with a Milwaukee WI bankruptcy attorney before you file a Chapter 7 bankruptcy case to eliminate tax debt. Once you file your bankruptcy case, you may not be able to dismiss or withdraw your case, even though you discover you cannot get rid of the tax debt because you calculated the days incorrectly.

What Happens if I File Chapter 13?

In a Chapter 13 case, you propose a bankruptcy plan to repay some of your debts to your creditors with the assistance of a Chapter 13 trustee.

If your old tax debt qualifies under the 3-2-240 Rule, that portion of the tax debt becomes an unsecured debt. As an unsecured creditor, the IRS receives a portion of the debt through your Chapter 13 case. At the completion of the case, the remaining balance of old tax debt is discharged with your other unsecured debts. Any portion of the tax debt that does not meet the requirements of the 3-2-240 Rule remains priority unsecured debt that must be paid in full during your Chapter 13 case.

As in a Chapter 7 case, there could be an exception that changes the dates used to calculate deadlines for old tax debt. Consulting an attorney is usually best to ensure you are using the correct dates.

Contact a Wisconsin Bankruptcy Attorney for More Information

Discharged tax debts in bankruptcy can be complicated in some cases. An experienced Wisconsin bankruptcy attorney at Hanson Payne can review your situation and provide legal advice and guidance about the options you have available for getting out of debt in the least costly and time-consuming process possible. Contact us today.

Working With An Inexperienced Attorney Is Not Worth The Risk

The last thing someone with a legal issue wants to deal with is an attorney who doesn’t know their head from a hole in the ground. But that happens far too often in the bankruptcy and collections world. Many attorneys that are great at helping businesses with other legal matters make huge mistakes when they decide to dabble in collections.

In 2018, Wisconsin Lawyers Mutual Insurance Co. (WILMIC), one of the leading legal malpractice insurers in our state, paid out more in bankruptcy and collections cases than it did in cases tied to any other area of law. This is because bankruptcy and collections cases are easy to mess up if you don’t know what you are doing, and even small mistakes are expensive to fix.

A Compliance Nightmare

From a creditor’s perspective, bankruptcy and collections cases are tricky because complying with the Fair Debt Collections Practices Act (FDCPA) is not easy. The FDCPA is designed to protect debtors, and it does a great job of it. Creditors must follow very specific rules on disclosures, communication with debtors, and timing, or face serious consequences.

Working with an attorney who isn’t familiar with the FDCPA puts you at risk of not just losing the opportunity to collect on your debts, but of being sued by the debtor.

Expensive Mistakes

The FDCPA is a strict liability statute that allows for fee-shifting. This means mistakes are easy for debtors to prove and expensive for creditors to fix.

Strict liability means liability attaches even when a creditor doesn’t know or intend for their action (or inaction) to violate the law. All the debtor has to show is that the creditor did something wrong. It doesn’t matter if the creditor, or the creditor’s attorney, thought what they were doing was fine.

When a creditor or a creditor’s attorney makes a mistake that violates the FDCPA, the debtor can then sue the creditor. If the debtor wins, which they almost certainly will because the FDCPA is a strict liability statute, then the creditor will have to pay damages or a fine, and pay the debtor’s attorney’s fees.

If the creditor was trying to collect from multiple debtors, a debtor’s rights attorney may file a class action lawsuit against the creditor. Such lawsuits are devastatingly expensive for all but the largest companies.

Don’t Hire Someone Who Dabbles In Debt

If you need to collect debts that you are owed, or a debtor you work with has filed for bankruptcy, you need to work with an experienced attorney to protect yourself from easy but expensive mistakes. Working with an attorney who has handled other business disputes for you is not a good idea.

At Hanson & Payne LLC we work with both debtors and creditors so we are intimately familiar with the ins and outs of the FDCPA and the bankruptcy courts. Financial disputes are all we do, so we know how to take care of them quickly and efficiently so you can get back to taking care of business.

Dairyland’s In Debt

If you are struggling to hold on to your family farm you are not alone.

According to the USDA, the estimated median household income for farm families in 2018 was negative $1,553.

In 2018, almost 700 dairy farms across the state of Wisconsin closed. According to data from the Wisconsin Department of Agriculture, Trade and Consumer Protection there are now just 8,046 dairy herds in the entire state. This is a 40 percent drop over the past 10 years.

For the third year in a row, Wisconsin lead the nation in farm bankruptcies filed under Chapter 12 of the bankruptcy code. Other farmers have filed under Chapter 7, Chapter 11, or Chapter 13, or gave up farming and sold everything off without filing for bankruptcy so they aren’t counted in the official “farm bankruptcy” reports, but we see them.

All this is to say, the ag industry is not doing well. If you are struggling, it’s not your fault. Things haven’t looked this bad since the 1980’s Farm Crisis.

At Hanson & Payne we are helping several farming families in Southeast Wisconsin determine what the best path forward for them may be. We don’t push our client’s to file for bankruptcy. We lay out all of the available options and discuss the pros and cons so you can make the decision that is best for you.

We appreciate how difficult it is to decide to give up your way of life and the land your family homesteaded on five generations ago. If you want to try and ride out the current slump, we can help. If you want to keep the house, but not your land, we can help. If you are ready to retire and move south, we can help. No matter what your goals are, we are here to lend a hand.

Losing Your Farm Is Not The Worst Thing That Could Happen

Not a lot of bankruptcy attorneys are talking about this, but we feel the need to say that financial help is not the only help you many need if your farm is in trouble. It’s no secret that suicide is becoming more common among farmers, but it’s probably the only topic people like talking about less than money.

If you are having suicidal thoughts, please ask for help.

You can find toll-free, 24/7 suicide prevention and emotional crisis hotlines at or by calling 1-800-SUICIDE and 1-800-273-TALK.

DATCP’s Farm Center, which can be reached at 1-800-942-2474 on weekdays from 7:45 a.m. to 4:30 p.m. has a lot of resources for farms and farmers in crisis. They can also be reached by email at

Farm Aid’s Farmer Resource Network and Hotline (1-800-FARM-AID) directs farmers to mental health and suicide prevention assistance all over the country.

You wouldn’t hesitate to help a neighbor, friend, or family member who was in distress, so don’t be afraid to help yourself or ask someone to help you.