Helping With Your Financial Future

Can bankruptcy help those with major income tax debts?

On Behalf of | Jun 17, 2024 | Chapter 7 Bankruptcy

Personal debt can arise as a result of a variety of different circumstances. Some people lose their jobs and end up carrying high balances on their credit cards because they don’t have income. Other people have some kind of medical emergency that requires uncovered that result from their treatment could add up to hundreds of thousands of dollars.

Other times, financial mistakes could be the reason for someone’s debt. Specifically, errors when filing income tax returns could potentially lead to someone developing a high level of income tax debt. One of the many solutions people use when facing insurmountable debt is a personal bankruptcy filing.

Can a Chapter 7 bankruptcy help someone resolve substantial income tax debts?

Only some income tax debts qualify for discharge

Most types of tax debt are not eligible for inclusion in bankruptcy proceedings at all. Property tax responsibilities, for example, persist even after a successful bankruptcy filing. Many income tax debts may also remain even after the courts discharge some of an individual’s financial obligations.

Technically, certain income tax debts are the only tax obligations eligible for discharge. However, the debts someone intends to discharge have to meet certain standards. Typically, they need to be at least three years old. The filer must have communicated with the IRS about the debt and filed appropriate tax returns.

Bankruptcy discharge is not an option in cases involving criminal prosecution for tax evasion or tax fraud. Additionally, people typically cannot discharge debts if the courts have already awarded a lien or garnishment to the government for those tax debts.

Typically, the IRS is quick to engage in enforcement actions in part to prevent people from discharging income tax debts. That being said, bankruptcy can still help those struggling with tax debt even if their tax responsibilities are not eligible for discharge.

The elimination of other financial obligations could make it easier for someone to catch up on their income tax obligations. They might also file their bankruptcy at a time when they face attempts to place liens against their property, which could prevent a judgment.

Discussing financial debts and the benefits of a personal bankruptcy filing with a skilled legal team could help someone determine the best solution for their unique circumstances. For many, discharging tax debts and eliminating other financial obligations can help people avoid worsening financial hardship when they fall behind on their taxes.