Tax Debt

The ability to deal with tax debt through bankruptcy varies depending on numerous factors. The following should not be construed as legal advice or tax planning advice, but instead as a starting point to educate you on the subject. Contact my office to discuss the specifics of your situation.


When can my taxes be included in a bankruptcy?

Taxes cannot normally be discharged through a bankruptcy, except in a few specific circumstances. However, this does not mean taxes can never be discharged through bankruptcy. The United States Bankruptcy Code addresses tax debt in a disorganized, disjointed way, with various sections touching on the subject. While the laws governing the treatment of tax debt under the Bankruptcy Code are fairly complicated, in practice their application is normally quite straightforward.

The primary taxes involved in bankruptcy filings are Federal, state, and local income taxes. Whether or not these taxes can be discharged is determined (in part) by the "3-2-240" rule.


the "3-2-240" Rule.

Income taxes must meet the "3-2-240" in order to be eligible for discharge (elimination). The requires:

  • The taxes must have become due at least 3 years before the filing of the bankruptcy, AND;
  • The bankruptcy debtor must have timely filed all returns to be discharged at least 2 years before the filing of the bankruptcy, AND;
  • The IRS has not assessed the taxes in the 240 days before the filing of the bankruptcy, AND;
  • The IRS in not arguing that the bankruptcy debtor willfully evaded taxes.

So, in summary, your taxes need to be older (at least 3 years old), not filed recently (had to have been filed but not paid on time, or filed more than 2 years ago), and must not have been reassessed within 240 days. And of course, you can have made no attempt to evade paying the taxes.

I can help you determine if (or when) your taxes meet these criteria. Once they do, the taxes can be treated like other unsecured debt, such as credit card debt. If you think your income taxes meet these criteria, or if you want a personal explanation and free consultation to discuss your tax debt, contact us immediately.


Tax debt and Chapter 13 bankruptcy

Back taxes and penalties (even those not meeting the "3-2-240 standard" above) can be included and discharged through a Chapter 13 bankruptcy. All taxes for the past 4 years must be filed before seeking Chapter 13 relief. These tax arrears must be paid in full through a Chapter 13 repayment plan in order for the bankruptcy to be discharged.

However, repaying taxes through Chapter 13 bankruptcy is often preferable to repaying outside of bankruptcy. The automatic stay stops government agencies from taking any actions against you while in bankruptcy. So, you won't have your wages garnished by the government while in bankruptcy.

Chapter 13 also allows payments to be spread out over a 5 year period, and it stops interest and penalties from accruing. This gives you the flexibility to deal with other pressing financial issues at the same time. Large tax obligations can become quite manageable when interest stops compounding, penalties stop accruing, and the repayment is spread over 60 months.