Many people struggle with overwhelming debt, and bankruptcy can be a good way to recover from it. It offers people a way to pay down or outright discharge remaining financial obligations. Bankruptcy can provide a way to start over and get life back on track.
Unfortunately, it won’t always negate debt owed to the IRS when filing for personal bankruptcy with Chapter 7 or Chapter 13. You will not be able to discharge any penalties accrued by attempting to evade taxes or file fraudulent returns. Tax debt is handled differently depending on what chapter you file for.
Chapter 7
In Chapter 7 bankruptcy proceedings, your assets will be sold to cover the cost of debts you owe. This includes tax debt, but you must follow strict guidelines:
- The tax return you are in debt from must have been due at least three years ago.
- You must have filed the tax return two years ago.
- You must have filed tax returns for the last four years.
The way the requirements are set up, you cannot immediately file for bankruptcy after accruing a tax debt. You must wait to become eligible, have submitted a valid tax return and have not tried to evade taxes.
If those requirements are satisfied, you’ll be able to find relief from debt owed to the IRS.
Chapter 13
Unlike Chapter 7, which liquidates a filer’s assets to pay for debts, Chapter 13 creates a payment plan for at least partial repayment of anything owed to creditors. That includes any accrued tax debt, meaning that once the repayment plan is complete, you will have paid off your past obligations to the IRS. Like Chapter 7, you must have filed tax returns for the last four years to be eligible.
Other considerations
Although bankruptcy can be a way to seek relief from tax debts, it doesn’t prevent you from accruing further debt in filings made while in the bankruptcy process. You must continue to file any returns that are due and pay any current taxes. According to the IRS, failure to do so could result in dismissal of your case.