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Requirements for Tax Debts in Chapter 7

If you have tax debts, you may hope that a bankruptcy filing can wipe these balances away. However, most tax debts can't be eliminated through the bankruptcy process.

Typically, Chapter 7 filers continue to owe tax debts at the end of the case. Chapter 13 are required to pay them in full through the repayment plan.

However, there are some exceptions to these rules, detailed below.

Conditions for Discharging a Tax Debt

In certain situations, taxes can be completely wiped out in Chapter 7 bankruptcy. Before you can turn to Chapter 7 to discharge federal income taxes, you will need to be eligible in the following ways:

  • The taxes must be income taxes. Other types, such as payroll taxes or fraud penalties, can't be eliminated in bankruptcy.
  • You haven’t been charged with fraud or willful evasion. If you've filed a fraudulent tax return or if you've otherwise attempted to evade paying taxes, bankruptcy will not eliminate those debts.
  • The debt must be at least three years old. A tax debt can only be eligible for elimination if the taxes were originally due three years before a bankruptcy filing.
  • You filed a tax return. In order for the tax debt to be considered in bankruptcy, you must have filed a tax return for this debt two years before the filing.
  • You have passed the "240-day rule". This means that the IRS must have assessed the tax debt at least 240 days before filing the bankruptcy petition.

Federal Tax Liens

After qualifying for the steps above, there is still one more issue left. If you are trying to eliminate a prior recorded tax lien, you may be out of luck. Chapter 7 only wipes out your obligation to pay the debt, not the lien itself. So you will need to pay off the lien in order to be able to sell your property at a future date.

Connect with an Attorney Near You Today

For more information on what you will need to eliminate a tax debt, you can connect with a bankruptcy lawyer in your area. Just fill out the form below to start this easy, no-obligation process now.

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