Can I file bankruptcy on IRS Debt? 3 Things to Know

Can I file bankruptcy on IRS Debt? 3 Things to Know
Information in this article does not constitute legal advice, it is for informational purposes only, and may not constitute the most up-to-date information. Readers should contact their attorney for advice on any particular legal matter.

If you're struggling with IRS debt, you may be wondering if filing for bankruptcy can help erase your tax debt. The truth is, dealing with the Internal Revenue Service (IRS) can be a daunting and stressful experience. Their debt collection efforts can be aggressive, with bank and property levies, as well as wage garnishment, making it difficult to pay living expenses and other debts. On top of that, back taxes can be a challenge to handle.

While IRS repayment plans are available, they may require large monthly payments that could be too expensive to afford. Moreover, the amount of IRS debt may decrease slowly as continued penalties and interest add up. So, can filing for bankruptcy provide relief from IRS debt?

It's important to note that not all tax debt can be erased through bankruptcy. For instance, if you owe taxes from unfiled tax returns, those debts cannot be discharged through bankruptcy. However, if your tax debts meet certain criteria, you may be eligible for relief.

Under Chapter 7 bankruptcy, certain tax debts can be eliminated if they meet specific requirements. For example, the tax debt must be income-based, and you must have filed a tax return for the debt at least two years before filing for bankruptcy. Additionally, the tax debt must have been assessed by the IRS at least 240 days before filing for bankruptcy.

If you don't qualify for Chapter 7 bankruptcy, Chapter 13 bankruptcy may still provide relief. Under this type of bankruptcy, you may be able to consolidate your tax debt into a manageable payment plan, allowing you to pay off your debt over time. Plus, filing for bankruptcy will put an automatic stay on IRS debt collection efforts, providing you with some much-needed breathing room.

Overall, filing for bankruptcy can be a complex and challenging process, especially when it comes to IRS debt. However, with the right legal guidance and support, you can navigate the process and find relief from your tax debt.

Keep on reading, or jump ahead to the section that interests you most.

Table of Contents

What Happens to Tax Debt When You File Bankruptcy for IRS Relief?

Declaring bankruptcy for IRS relief may not wipe out your tax debt completely. This is because most tax debts are ineligible for discharge through bankruptcy. Before filing for bankruptcy, it is crucial to analyze your tax debt thoroughly to determine if bankruptcy can provide IRS relief.

However, there is a silver lining. In some cases, old tax debts may be dischargeable through bankruptcy. To qualify for discharge, the tax debt must be for personal income taxes and meet three specific requirements outlined in the criteria for discharging personal income taxes in bankruptcy.

1.  Older Tax Debt

If you're dealing with personal income tax debt, it's important to note that it must be for older tax debt. Specifically, the taxes you owe must have become due at least three years before you file for bankruptcy relief. This means that you may have some options when it comes to dealing with this type of debt. It's worth taking the time to consider what those options are and how they might benefit you.

2.  Filing of Tax Returns

Filing tax returns is a crucial step before seeking bankruptcy relief for tax debt. However, it can be quite a challenge if you have fallen behind on your taxes. To qualify for bankruptcy relief, you must file the tax returns that caused the tax debt at least two years before filing for bankruptcy.

It's essential to stay on top of your taxes to avoid any complications when seeking financial relief. While it may seem daunting, timely filing of tax returns can save you from future legal and financial troubles.

3.  Assessment of Tax Debt by IRS

If you're considering filing for bankruptcy, you may be wondering if your personal income taxes can be discharged. To qualify for a discharge, three criteria must be met:

  • The tax return must have been filed at least two years before filing for bankruptcy.
  • The tax return must have been due at least three years before filing for bankruptcy.
  • The IRS must have assessed the tax debt at least 240 days before filing for bankruptcy.

It's important to note that certain events, such as requesting an extension for filing a tax return or requesting an IRS payment plan, can affect these time requirements. If you're unsure whether your IRS debt is eligible for discharge, it's best to consult with an experienced bankruptcy attorney before filing for bankruptcy. Once the bankruptcy case is filed, it may not be possible to undo the consequences. Partnering with a knowledgeable attorney can ensure accurate calculations of the time requirements for discharging IRS income tax debt.

Chapter 13 Bankruptcy and IRS bankruptcy for tax debt

If you're struggling with personal income tax debt that you can't discharge in Chapter 7 bankruptcy, don't lose hope. Filing for a Chapter 13 bankruptcy might be a viable solution. Personal income tax debt that cannot be discharged is classified as a priority unsecured debt, which can be paid off in full through a Chapter 13 plan.

One significant advantage of filing for Chapter 13 bankruptcy to get relief from the IRS is that the IRS cannot continue its collection efforts for the tax debt while you're in bankruptcy, provided that the tax debt is included in your bankruptcy plan. Furthermore, you may end up paying much less for the IRS debt through your Chapter 13 plan than you would if you had worked out a repayment plan with the IRS directly.

Once you complete your Chapter 13 plan, your IRS debt will be eliminated, and you'll also be able to get rid of most, if not all, other unsecured debts. Additionally, if you meet specific requirements, you may be able to pay off your car loan for less than you owe on your car through Chapter 13.

If you're looking for a way to get the IRS off your back and repay your tax debt without wage garnishments and levies, Chapter 13 bankruptcy might be your best bet. If you're uncertain whether Chapter 13 can eliminate your tax debt, we recommend consulting with a bankruptcy lawyer.

Do You Want to Get Out of Debt via an IRS bankruptcy? 

If you're struggling to pay off your debts, there are several debt relief options available that can help you get rid of them. While bankruptcy might be one such option, there are alternatives to bankruptcy that you can explore, such as tax debt relief. In tax debt relief, a tax professional will handle your case and help you deal with your tax debts. Though not guaranteed, possible outcomes of tax relief include an offer in compromise, an installment agreement, a penalty abatement, a non-collectible status, or an alternative solution. So, if you're looking for a way out of debt, tax debt relief could be a viable option for you.

We understand the challenges of dealing with debt. That's why we offer a range of services to help you manage your debt effectively and prevent it from piling up again in the future. Our services are designed to help you deal with debt now and equip you with the tools and knowledge you need to stay out of debt in the long run. So, if you're looking for a reliable partner to help you get out of debt and stay financially healthy, we are here to help.

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