Does Bankruptcy Wipe Out Back Taxes?

Yes, bankruptcy wipes out back taxes. Taxes are unsecured debts, like credit cards and medical bills. The taxpayer simply promises to pay these debts. The taxpayer doesn’t put up any security, like a house or car. However, under the Bankruptcy Code, back taxes are priority unsecured debts. So, they’re only dischargeable in certain situations. More on that below.

The IRS offers a few forgiveness and repayment programs. But only a small percentage of taxpayers qualify for these programs, even under the new Fresh Start Law. However, almost everyone qualifies for bankruptcy. Furthermore, a Chicago bankruptcy lawyer uses obscure loopholes to maximize the fresh start, which includes relief from back taxes, that the Bankruptcy Code guarantees.

Discharge in a Chapter 7

Priority unsecured debts include child support, student loans, and for purposes of this post, past-due income taxes. Past-due income taxes (not past-due property or any other kinds of taxes) are dischargeable in bankruptcy if:

• The due date for the tax return(s) at issue, including any extensions, was at least three years before the bankruptcy filing date. Note that Tax Day is not always April 15.
• You filed the tax return for that specific debt at least two years before filing for bankruptcy. Only taxpayer-filed returns satisfy this requirement. Substitute returns that the IRS files on behalf of nonfiling taxpayers do not count.
• The IRS must have assessed the tax at least 240 days before your bankruptcy filing. If the tax was never assessed, this rule may not apply. “Assessment” is an accounting term that basically means calculating the total amount due.

Even if the taxpayer doesn’t meet the discharge rules, the Automatic Stay still applies. Section 362 of the Bankruptcy Code prohibits the IRS, or any other creditor, from filing lawsuits, garnishing wages, or taking most other adverse actions.

Repayment in a Chapter 13

A Chapter 13 bankruptcy doesn’t technically “wipe out” back taxes. However, this form of bankruptcy empowers taxpayers to wipe out their own tax debts on their own terms. In some respects, that outcome is better than wiping out the taxes. The taxpayer’s credit report will reflect the fact that the taxes were paid.

Chapter 13 gives debtors up to five years to pay allowed claims, which include secured debt arrearage (e.g. past-due mortgage payments), priority unsecured debts, and a few other claims, such as administrative fees and legal fees for a Chicago bankruptcy lawyer.

Additionally, bankruptcy mediation is usually part of a Chapter 13. If a Chicago bankruptcy lawyer files a motion to discharge tax debt, the judge usually appoints a mediator to help the parties resolve the matter out of court. During mediation, both sides have a duty to negotiate in good faith. They must be willing to make compromises, if that’s what it takes to settle the case.

Therefore, Chapter 13 debtors usually receive at least a partial past-due income tax discharge. The IRS also often agrees to waive some penalties and interest payment in these cases.

Work With a Dedicated Cook County Lawyer

No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters throughout the Prairie State.

Source:

orb.uscourts.gov/faq/how-do-i-know-if-debt-secured-unsecured-priority-or-administrative