A common question that people have about bankruptcy is whether they will be able to “wipe out” (referred to in bankruptcy terminology as “discharge”) certain taxes owed to the Federal and State governments if they file bankruptcy.
If you file a Chapter 7 bankruptcy case, then your income taxes can only be wiped out if all of the following are true:
- the due date for the tax return for the tax year in question must be more than three years ago,
- the tax return for the tax year in question must have been filed on time (if the tax return was not filed on time, then it must have been filed more than two years ago), and
- the tax must have been assessed against you by either the Federal or State government at least 240 days (eight months) ago.
In addition, your income taxes cannot be wiped out in bankruptcy if you filed tax returns that were fraudulent or if you took any action to intentionally attempt to avoid the tax. If the government determines that you have filed fraudulent tax returns or have intentionally attempted to avoid paying your taxes, then those taxes may not be wiped out in bankruptcy.
It is important to realize that even when your tax debts cannot be wiped out in bankruptcy, then you may still be able to file a Chapter 13 bankruptcy case that will allow you to pay off your tax debts. Chapter 13 bankruptcy will stop the government from continuing to add interest on the amount owed for your tax debts, and Chapter 13 bankruptcy can allow you to create a manageable repayment plan during which time your tax debts can be paid off.
The determination of whether you will be able to wipe out your tax debts in bankruptcy may be a large factor in deciding whether bankruptcy is the right option for you, and you should speak with an experienced bankruptcy attorney who can assist you in reviewing your tax debts to see which, if any, of your tax debts can be wiped out by filing bankruptcy.