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.