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Does Bankruptcy Solve My Tax Problem?


The Illinois Department of Revenue has very broad wage garnishment powers. With as little as ten days’ notice, the IDR can order your employer to deduct up to 15 percent of your paycheck to pay past-due state taxes. Most families barely make ends meet. A 15 percent pay cut is often a devastating financial blow.

A Chicago bankruptcy lawyer offers short term and long term solutions. Bankruptcy immediately stops wage garnishment. The Automatic Stay in Section 362 of the Bankruptcy Code also applies to foreclosure, repossession, and most other adverse actions. Additionally, as outlined below, consumer bankruptcy gives distressed debtors several ways to retire past-due taxes without the government garnishing their wages or charging high penalties and interest.

Discharge in a Chapter 7

Usually within six months, Chapter 7 discharges most unsecured debts. Financially, back taxes are unsecured debts. The taxpayer simply promises to pay taxes. However, for bankruptcy purposes, past-due taxes are priority unsecured debts which are only dischargeable in certain situations. The discharge rules are:

  • Income Taxes: Only past-due income taxes are dischargeable in bankruptcy. Past-due property and other taxes aren’t dischargeable under any circumstances. Additionally, if the income taxes are past due because of taxpayer fraud, the debt isn’t dischargeable. The fraud label usually applies if taxpayers fabricate exemptions or “forget” to report income streams.
  • Three Years: Income taxes are dischargeable if they are at least three years old. Frequently, taxes aren’t due on April 15. The 15th might be a Sunday or holiday. One or two days may seem insignificant. However, to the IDR, there’s no such thing as a trivial date or amount. This agency has disputed discharge if the taxes were only a day or two short of three years old.
  • Two Years: Taxpayer-submitted returns must have been on file for at least two years. A substitute return the IDR files to calculate taxes doesn’t count. If taxpayers timely filed their returns, this additional deadline is irrelevant.
  • Six Months: If the taxing authority has assessed the debt within the last six months, past-due income taxes aren’t dischargeable. Generally, if the IDR sent a letter within the last six months that includes the total amount due, its accountants have probably assessed the debt. Only a Chicago bankruptcy lawyer can tell for sure.

Other priority unsecured debts include student loans, which require taxpayers to prove undue hardship, some tort (personal injury) judgements, and child support, alimony, or other family support obligations. FSOs are almost impossible to discharge.

Repayment in a Chapter 13

These strict rules don’t apply in Chapter 13 repayment plan bankruptcies. Depending on their income and a few other factors, debtors have up to five years to pay back past-due taxes and other past-due obligations. The Automatic Stay usually remains in force during the repayment period, so the IDR cannot touch taxpayers.

If taxpayers dispute the amount owed in a Chapter 13, or in a Chapter 7 for that matter, the judge usually refers the matter to mediation. There’s a good chance the taxpayer will obtain at least partial UPB (unpaid principal balance) forgiveness. During mediation, both parties have a duty to negotiate in good faith. They must compromise, if that’s what it takes to strike a deal.

Connect With a Tough 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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