Erasing Income Tax Debt In Bankruptcy

There can be many reasons to consider filing bankruptcy. Most commonly, people are forced to file due to job loss, divorce, or medical problems that result in expenses that exceed coverage by medical insurance. 

Often such financial calamities result in past-due, unpaid income tax, among other debts. In certain very specific circumstances, unpaid income tax can be discharged in bankruptcy.

Can Income Tax Be Discharged In Chapter 13 Bankruptcy?

Yes. Although income tax is a priority debt and the government has made it difficult to get it discharged in bankruptcy, it is possible to do so. However, know that if you have evaded paying taxes or committed other tax fraud, those taxes are not eligible for discharge.

What Is Chapter 13 Bankruptcy?

Chapter 13 is for debtors who have a regular income. When you file a bankruptcy petition under Chapter 13 of the federal Bankruptcy Code, you disclose all of your income, expenses, assets, and debts. You and your attorney craft a 3- or 5-year monthly repayment plan that you can afford and that will accomplish the goal of your filing.

The minute you file a bankruptcy petition, the “automatic stay” is in effect, which stays or stops all creditor action against you. This includes foreclosure proceedings and collection lawsuits, auto repossession, wage garnishment, a levy on bank accounts, and the filing of judgment liens on your real property. The automatic stay remains in effect until you complete making your monthly plan payments to the Chapter 13 Trustee, you receive a discharge of unpaid unsecured debt, and your case closes.

The Debt Problems You Can Resolve Through Your Chapter 13 Plan

  • Catch up on past due to mortgage payments
  • Catch up on past due to car lease or loan payments
  • Catch up on past due to alimony or child support payments
  • Catch up on past due government fines or fees
  • “Cramdown” a car loan and pay it off, to own the car when planning complete
  • “Strip off” a second mortgage or line of credit, and have it discharged as unsecured
  • Discharge student loans (under very limited circumstances)
  • Pay off your bankruptcy attorney’s fee
  • Pay some or none of your past-due income tax and have the unpaid remainder discharged

How to Discharge Income Tax in Chapter 13 Bankruptcy

First, Apply the 3 Year Rule:

The federal income tax you want to have discharged must have been due to be paid a minimum of three years ago, so look to April 15 of that year, unless you filed for an extension – then the three years starts the day the extension expired. If you want to have state or local taxes discharged, that date will be different. 

For example, you failed to pay the federal income tax due April 15, 2017, that past-due income tax is not dischargeable until April 15, 2020, at the earliest. 

Then, Apply the 2 Year Rule:

You must have filed the return for the federal income tax you want to have discharged, and you cannot file bankruptcy to have it discharged until two years have passed since the date of filing. 

Be careful! The date your taxes are officially “filed” is established not only by when you sent the tax return to the IRS but also by how you sent it.  

If you mailed your tax return via USPS certified mail on or before April 15, your return will be officially filed on April 15 even if it arrives later. But if you mail your return after the 15th, or you send it by the private mail carrier and it arrives after the 15th, the filing date will be the actual day the IRS receives it.

Last, Apply the 240 Day Rule:

If you owe past-due income tax and it is just that you haven’t paid it yet, then all you need to do is find out the date of assessment and file bankruptcy 240 days later.

However, if you owe past-due income tax and are in dispute with the IRS over what you owe, the IRS is probably assessing additional taxes against you and that will change the timing of your filing if you want these additional amounts discharged as well.  

Can Income Tax be Discharged in Chapter 7 Bankruptcy?

Yes, but income tax is the only type of tax that can be discharged in Chapter 7. Before you file for Chapter 7 in an attempt to eliminate tax debt, you should first become familiar with the discharge requirements which track the requirements of income tax discharge in a Chapter 13 case. These are as follows:

  • The taxes were due at least three years ago.
  • You filed the tax return at least two years ago.
  • The taxes were assessed at least 240 days ago.
  • There was no tax fraud on your part.

As you can see, getting income taxes discharged in bankruptcy can be a complicated process, because timing is everything. Consult with an experienced bankruptcy attorney to assess your particular case and ensure that you follow all of the rules to get all of the dischargeable income tax discharged.

About the Author

Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with David M. Offen, Esq., a busy bankruptcy attorney in Philadelphia.