How will filing bankruptcy address my tax debt?

Bankruptcy can help with taxes in some cases. However, it is not always the complete solution that everyone expects.

With the arrival of 2015, it is time to face a dreaded time of the year for many-tax season. Although virtually anyone who ends up owing taxes can find this time of year financially difficult, those that are struggling to pay many years' worth of tax debt have it the hardest. Many people in this situation assume that bankruptcy can help get rid of tax debt in the same manner as other types of debt. However, in reality, bankruptcy may not be the solution that many hope for.

Back taxes and bankruptcy

Unfortunately, obtaining a discharge of tax debt in bankruptcy is not as easy as other types of debt, such as credit cards bills and medical debts. Whether back taxes are dischargeable depends largely on the year that they were owed. Under the bankruptcy code, tax debt may be eliminated if:

• The tax return for the tax debt in question was filed at least two years before the bankruptcy was filed. Significant obstacles to receiving a discharge can develop for late returns.

• The tax debt has been due for at least three years. If any extensions have been granted by the IRS, three years must have passed since the new due date.

• The IRS has assessed the tax debt at least 240 days before the bankruptcy was filed.

• There was no effort on the taxpayer's part to defeat or evade taxes or file a fraudulent tax return.

Tax debt meeting all the above criteria can be discharged in bankruptcy. Once discharged, the legal obligation to repay the debt (plus late fees and interest) is wiped away.

Persons with tax debt not meeting these standards should not despair, as bankruptcy can still help. For example, filing Chapter 7 bankruptcy can indirectly help by eliminating most other debts, which can free up financial resources to direct towards the tax debt. This solution may be ideal for those whose taxes are a small portion of their total debt load.

Those whose tax debt is more substantial may benefit from filing Chapter 13 bankruptcy instead. In this type of bankruptcy, the tax debt is consolidated into a payment plan. Pursuant to the plan, the back taxes are repaid in monthly installments over a three to five-year period. As long at the payments are made each month, the IRS is prohibited from engaging in collection actions (e.g. wage garnishment) against the taxpayer.

Struggling with taxes? Speak to an attorney

Although bankruptcy is a viable solution for many persons struggling with tax debt, it may not always be the right remedy. Because of this, it is helpful for everyone in this situation to consult an experienced bankruptcy attorney to learn about all available options and receive a recommendation on the best way to proceed.