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Chicago Bankruptcy Lawyer > Blog > Bankruptcy > Can You File Bankruptcy on IRS and State Taxes?

Can You File Bankruptcy on IRS and State Taxes?


Many Illini are behind on their taxes, mostly because the era of the pure 9-to-5 job is gone. In the United States alone, freelancers now earn more than $1.3 trillion per year. Since this income is uneven, it’s easy to fall behind on estimated tax and other such payments. Taxing authorities, especially in cash-strapped jurisdictions like Illinois, are anxious to get a share of that money. If you cannot pay your taxes, bankruptcy might be an option.

Taxes are due every year, so wiping out past-due tax debt is only part of the puzzle. A Chicago bankruptcy attorney wipes out prior tax debt or gives taxpayers additional time and space to repay their debts. Attorneys also help debtors maximize the fresh financial start the Bankruptcy Code guarantees. Many businesses rely on repeat customers. We’re happy to handle one of your bankruptcies, but we hope it’s the only one.

Discharge in a Chapter 7

Taxes, like credit card bills, are unsecured obligations that aren’t tied to houses, cars, or any other collateral. Normally, Chapter 7 discharges unsecured debts, usually in as little as nine months.

However, past due taxes, along with student loans, child support, alimony, and other government-affiliated debts, are priority unsecured debts that are only dischargeable in some situations. For income taxes, the discharge rules are:

  • Returns have been on file for at least two years,
  • The taxes are at least three years old, and
  • The taxing authority hasn’t assessed the debt in the past 240 days.

Assume Mary filed her 2020 return in 2022. She didn’t pay the tax she owed. If she files Chapter 7 in 2024 (two years after she filed the return), her 2020 unpaid income tax might be dischargeable.

Assessment is an accounting term. A Chicago bankruptcy lawyer must pull a tax transcript to determine the most recent assessment date. However, as a rule of thumb, if the Illinois Department of Revenue sends a letter with the total amount due, a bean-counter probably assessed the debt.

Other rules concern the nature of the taxes and the nature of the nonpayment. Only income taxes are dischargeable. Property and other taxes aren’t dischargeable. Additionally, fraudulent tax debts aren’t dischargeable.

“Discharge” means the judge erases the legal obligation to pay the debt. But the obligation itself remains. If Mary wants an IRS job, she must repay the taxes, whether or not a judge discharged them.

Repayment in a Chapter 13

These rules are very strict. The assessment rule usually catches most taxpayers. If your income taxes are not dischargeable, Chapter 13 repayment is a good option. Chapter 13 blocks all adverse action, such as wage garnishment and bank account levy. The Automatic Stay might also prevent the IDR from adding penalties and interest to a tax debt. The law is a bit uncertain on this point.

Basically, Chapter 13 is like an installment repayment agreement that everyone qualifies for and has some additional benefits. Most Chapter 13 bankruptcies last five years.

Additionally, Chapter 13 repayments are income-based. Taxpayers repay debts according to what they can afford, not according to what the IDR or another creditor demands.

 Count on a Dedicated  Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

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