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Does Bankruptcy Get You Out Of Back Taxes?


Consumer bankruptcy shields people from most kinds of creditor adverse action, including adverse actions based on back taxes. The IRS aggressively goes after unpaid taxes. These unpaid taxes total about $500 billion, which is roughly 10 percent of the government’s annual budget. We may think about how a 10 percent income hike would change our lives. The government can make it happen. The IRS has collection tools that private debt buyers only dream about.

As outlined below, there are several ways bankruptcy can get you out of back taxes. None of these options are particularly easy. A Chicago bankruptcy lawyer evaluates your case and lays out your legal options. In addition to using the bankruptcy laws, an attorney can also negotiate with the IRS or other taxing authority, to help you take advantage of some programs that may be available under the Fresh Start Initiative.

Discharge in a Chapter 7

Back taxes are unsecured debts, which are dischargeable in a Chapter 7 bankruptcy. “Discharge” means the judge eliminated the legal obligation to repay a debt. The collateral consequences, if any, remain. So, if the IRS filed a lien before you filed bankruptcy, a Chicago bankruptcy lawyer must take care of that lien separately, even if a judge discharges the debt.

The IRS cannot file a lien or take any other adverse action after you file bankruptcy, because of the Automatic Stay. Section 362 of the Bankruptcy Code prohibits almost all creditor adverse actions, such as wage garnishment, lien placement, and collection lawsuits. Federal courts have consistently held that the IRS must follow the same rules as private debt collectors.

Back taxes are priority unsecured debts which are only dischargeable in certain situations. The back tax discharge rules are:

  • 240 Days: If the IRS assessed the debt in the last eight months, the debt is nondischargeable. Assessments are noted on tax transcripts. As a rule of thumb, before the IRS sends a letter that includes the total amount due, it usually assesses the debt.
  • Two Years: Returns filed by the taxpayer, and not substitute returns that the IRS prepared, must have been on file for at least two years prior to the bankruptcy filing.
  • Three Years: Unpaid income taxes that are at least three years old are dischargeable in bankruptcy. The IRS has successfully blocked discharge because the taxes were two or three days short of three years old.

The same discharge rules apply in a Chapter 13. However, most people with back taxes file Chapter 13 to get time to repay their taxes. More on that below.

Other priority unsecured debts in bankruptcy include student loans, most criminal fines, and alimony, child support, and other FSOs (family support obligations).

Repayment in a Chapter 13

We mentioned the Fresh Start Initiative above. IRS bureaucrats decide who does and doesn’t qualify for relief under this tax repayment program.

In contrast, almost everyone qualifies for Chapter 13 bankruptcy. These debtors get up to five years to repay their past-due taxes, and other allowed claims, with an income-based monthly debt consolidation payment. The other allowed claims in a Chapter 13 usually include past-due priority unsecured debts and past-due secured debt payments.

 Work With a Tough-Minded 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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