Many people call our law firm and ask questions about bankruptcy. One such question is if filing for bankruptcy will wipe out any unfiled or unpaid income tax debt. The question is a good one since many people have to file bankruptcy, in part, due to tax debt. However, the answer is not one that many people want to hear.

Tax debts stay with you unless the government agrees to either reduce or waive them. This means that filing for bankruptcy alone is not going to wipe them out like it can with unsecured debt.

What happens in Chapter 7 bankruptcy

A Chapter 7 bankruptcy is a liquidation bankruptcy. This is designed to wipe out or eliminate all unsecured debts and give a person the option of whether to eliminate secured debts or to reaffirm them and continue making payments. This type of bankruptcy is ideal for anyone who has a lot of credit card or medical debt that they wish to eliminate.

However, since Chapter 7 bankruptcy is a liquidation event, the court can order to confiscate and sell assets as well. This makes it not ideal for anyone who has a lot of assets like savings accounts or rental properties.

What happens in Chapter 13 bankruptcy

Chapter 13 bankruptcy is a reorganization bankruptcy. It allows for debtors to pay a portion of their debts over a period of time. Typically, the repayment plan will make it possible for creditors to receive some of what they are owed, but not all. After a period of five to seven years, the system will wipe out or eliminate any other amount. Still, tax debt cannot be wiped out.

Options for tax debt

When someone files for bankruptcy, it is a clear indication of financial instability. If a person were to file, it shows creditors, including the IRS, that they do not have enough money coming in to pay their debts and other obligations. As such, many creditors are willing to negotiate and reach things like payment terms or reduce settlement arrangements in order to hopefully get something.

Knowing that the IRS debt will not be wiped out, the IRS is unlikely to waive the tax debt. However, they will typically enter into a payment plan at this point. If someone is going through a bankruptcy, the court will consider any required tax payments as a current debt when working to approve something like a liquidation or reorganization plan.

We can navigate the system for you

Working with an attorney can make it easier to get the IRS to agree to a repayment plan that is affordable and sustainable. An attorney can also sometimes get the IRS to reduce or drop any penalties associated with late filings or late payments due to the circumstance. It really depends on the overall picture and the negotiation skills of the attorney involved.

It is also important to know that if a tax refund is coming, the bankruptcy court must be made aware of it because the refund may go towards paying creditors or will need to be listed as an exempt asset.

Speak with an attorney

To learn more about bankruptcy and how it can impact tax debt, call our office and speak with an experienced attorney.

NOTE: This is for informational purposes only and does not constitute legal advice.