What Happens to Tax Debt When You File Bankruptcy?

 Posted on June 19, 2024 in Bankruptcy

Filing for bankruptcy can provide much-needed relief for individuals struggling with overwhelming debts, including tax debts. However, it is essential to understand that not all tax debts can be discharged through bankruptcy. A Texas lawyer can help you understand what happens to your tax debt when you file for bankruptcy and the specific requirements that must be met for tax debts to be eligible for discharge.

Types of Bankruptcy and Tax Debt

There are two primary types of bankruptcy that individuals can file in Texas: Chapter 7 and Chapter 13. The treatment of tax debt varies depending on the type of bankruptcy filed.

Chapter 7 Bankruptcy and Tax Debt

In a Chapter 7 bankruptcy, certain types of tax debt may be discharged, provided they meet specific criteria. To be eligible for discharge, the tax debt must be income tax debt, and the following conditions must be satisfied:

• The tax return linked to the debt must have been due at least three years prior to the bankruptcy filing
• The tax return had been filed at least two years prior to the bankruptcy filing
• The tax assessment took place a minimum of 240 days prior to the filing for bankruptcy
• The tax debt does not stem from fraudulent or evasive actions

If these requirements are met, the tax debt may be discharged through Chapter 7 bankruptcy, relieving the individual of the obligation to pay the debt.

Chapter 13 Bankruptcy and Tax Debt

In Chapter 13 bankruptcy, tax debts are generally incorporated into the repayment plan. The debtor commits to settling the tax debt within a period of three to five years. Although the tax debt may not be eliminated, filing for Chapter 13 bankruptcy offers an organized method to repay the debt over time, frequently under more advantageous conditions than those proposed by the IRS.

The Automatic Stay and Tax Debt Collection

Regardless of the type of bankruptcy filed, an automatic stay goes into effect upon filing. This stay prevents creditors, including the IRS, from continuing collection actions against the individual. The IRS must halt wage garnishments, bank account levies, and other collection efforts while the bankruptcy case is pending.

Considerations for Filing Bankruptcy with Tax Debt in Texas

Before filing for bankruptcy to address tax debt, it is helpful to consult with a bankruptcy attorney in Texas. An attorney can assess your individual circumstances, ascertain if your tax debts qualify for discharge, and recommend the most suitable course of action.

You should remain current on your tax filings and payments during and after the bankruptcy process. Failure to do so can result in new tax debts that may not be dischargeable in bankruptcy.

Contact an Arlington, TX Bankruptcy Lawyer

If you are struggling with tax debts and considering bankruptcy, contact a Dallas, TX bankruptcy attorney to see which options you may have. Call Acker Warren P.C. at 817-752-9033 to start with a free, no-obligation consultation.