Can I Eliminate Tax Debt Through Bankruptcy?

by Paul R. Tom Basic Bankruptcy Information, Myths and FAQs

Our tax website has more information on this topic, but here are some basics you’ll want to know if you do have tax debt.

The basic rule is that income tax debt over three years old can usually be discharged in a Chapter 7. You can also use the bankruptcy laws to force the IRS or the Oklahoma Tax Commission to accept a payment plan through a Chapter 13 with payments you can afford, rather than what they demand. Bankruptcy laws will give you up to five years in a Chapter 13 to pay these taxes, without any penalties being charged. This can significantly reduce the amount you would have to pay the IRS if you attempted to pay the taxes on your own without using the bankruptcy laws. The rules concerning taxes and bankruptcy are very technical.

Will Bankruptcy Stop a Tax Levy?

The IRS must release its tax levy if you file a Chapter 13 bankruptcy proceeding. If your Chapter 13 provides to pay any non-dischargeable taxes through the Chapter 13 Plan, the IRS will not be able to continue any collection activities unless you incur new tax obligations in the future. For all tax obligations incurred before you file bankruptcy, the IRS is stopped from all collection activity. The same applies to the Oklahoma Tax Commission.

Does Filing Bankruptcy Stop the IRS From Seizing My Assets?

When any type of bankruptcy is filed, the Federal Bankruptcy Court issues an automatic stay order requiring all creditors, including the IRS , to cease all collection actions. The IRS and other taxing agencies must stop the seizure of any of your assets. Even when most of these taxes cannot be discharged, you can still use a Chapter 13 Plan to force the IRS and your other creditors to take a payment plan based on what you can afford to pay, rather than what they demand.

What If I Have Not Filed Tax Returns?

In a Chapter 7, bankruptcy taxes cannot be discharged if you have failed to file tax returns for a given year or if you have filed a fraudulent return. However, the bankruptcy laws can still help you if you are willing to file your returns. You can use a Chapter 13 Plan to give you up to five years to pay off taxes.

The laws governing tax debt in bankruptcy cases are complex. If this situation applies to you, please consult with us as soon as possible for specific guidance and answers.