Tax debt is one of the primary reasons people file bankruptcy. However, whether the person selects chapter 7 or chapter 13 bankruptcy will depend on the nature of the tax debt, assuming other significant debts or assets do not exist. Some old tax debts can be eliminated in chapter 7 bankruptcy or paid with other unsecured debts in chapter 13 bankruptcy. Some recent tax debts will not be eliminated in chapter 7 bankruptcy but can be paid with little to no interest over several years in chapter 13 bankruptcy.
Warning: always consult a bankruptcy attorney before filing chapter 7 or chapter 13 bankruptcy. Tax debt in bankruptcy is a very complicated subject that even few attorneys fully understand. If possible, hire an attorney to prepare your bankruptcy documents and represent you in chapter 7 or chapter 13 bankruptcy.
Old Tax Debt
Some tax debts can be eliminated in chapter 7 bankruptcy or share a pro rata distribution with other unsecured debts in chapter 13 bankruptcy. In general, tax debt that is at least 3 years old for which a return was filed at least 2 years ago and the debt assessed more than 240 days ago is dischargeable in chapter 7 bankruptcy or can be classified as non-priority debt in chapter 13 bankruptcy. However, for the debt to be dischargeable or classified as non-priority debt the tax return must also have been filed on-time.
Recent Tax Debt
Any tax debt that does not meet the 3 year old, 2 year tax return filed on time, 240 day assessment rule cannot be eliminated in chapter 7 bankruptcy and will be classified as priority tax debt in chapter 13 bankruptcy. (Assuming there is not recorded tax lien). These recent tax debts are best resolved through a 3 to 5 year chapter 13 bankruptcy repayment plan in which the tax debt will be repaid with little to no interest.
If you have tax debt and are contemplating bankruptcy call our bankruptcy attorney at (916) 596-1018 to take advantage of a free consultation.