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Is It Possible to Discharge Your Tax Debts in Bankruptcy?

Jan. 25, 2021

Many people struggle with tax debts. Whether it’s because they had to use their savings toward necessities or because they underpaid and received a surprise bill from the Internal Revenue Service, those debts may feel overwhelming.

Some people may already be struggling financially when those tax debts hit, and so they may decide not to pay. If that happens, the IRS may pursue collections actions.

What Happens if You Don’t Pay the IRS?

If you don’t set up a payment plan with the IRS, you’ll first receive a notice that you have past-due taxes. After that, you’ll receive more letters as time goes by. Eventually, the IRS will issue a legal notice and may file a lien, garnish your wages or seize your bank account.

Can Bankruptcy Help You Avoid Wage Garnishment & Other Penalties from The IRS?

Sometimes. To begin with, all bankruptcies will create an automatic stay. When that occurs, IRS agents will no longer be able to send you notices about those back taxes and won’t be able to continue to attempt to collect that debt. This buys you time, but it doesn’t mean that the debt will be forgiven.

Can Tax Debts Be Forgiven in Bankruptcy?

With a Chapter 7 bankruptcy, you may be able to have your tax debts forgiven, but it depends on what kind you owe. Income taxes are the only type that can ever be discharged during a Chapter 7 bankruptcy. There are also other rules that will apply to your case, such as that the tax debt must be at least three years old or that the tax assessment has to be over eight months old.

If you don’t meet those requirements, then you could find that you’re not able to discharge the tax debts in bankruptcy.

That doesn’t mean that bankruptcy won’t help in other ways. Sometimes, paying down or eliminating other debts makes it easier to pay the IRS and get out of debt with them. Your attorney can talk to you more about the likelihood of discharging your debts owed to the IRS and how bankruptcy will or will not help in your specific situation.