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Does Bankruptcy Clear Tax Debt?

Worried Couple Holding Help Sign While Calculating Bills

Bankruptcy can be a vitally useful legal tool for consumers trying to get out from under crippling debt. Certain types of debts, however, can be more difficult to clear than others. How do state and federal taxes factor into a bankruptcy proceeding? Can they be discharged, or are they non-dischargeable in bankruptcy? Continue reading for a discussion of how tax debt is treated under the bankruptcy laws, and reach out to a seasoned Ventura debt relief and bankruptcy attorney for help getting out from under crippling debt.

When Can You Include Tax Debt in Your Chapter 7 Bankruptcy?

Thankfully, both state and federal tax debt can be included in a bankruptcy, depending on the circumstances of the debt and the debtor. Chapter 7 bankruptcy wipes clean all covered debts, meaning creditors (including the government) cannot garnish your wages or engage in other collection efforts. Taxes cannot always be discharged, however. Certain requirements must be met.

In order to include tax debt in your Chapter 7 bankruptcy, the following must be true:

  • The debt must be state or federal income tax debt or California tax liability debt. Other forms of taxes, such as fraud penalties or payroll taxes, cannot be discharged in bankruptcy.
  • The tax debt must be at least three years old. You cannot declare bankruptcy to get rid of this year’s or last year’s taxes. The taxes must have been due three years ago–meaning 2015’s tax debt, usually due April 15, 2016, cannot be discharged in bankruptcy until at least April 15, 2019.
  • You must have filed your tax return pertaining to the debt at least two years before filing for bankruptcy. If you failed to file a return, or if you relied on various extensions and it has been less than two years since you filed, you cannot eliminate your tax debt in bankruptcy.
  • You must not have willfully evaded your taxes or filed a fraudulent return. Bankruptcy only covers taxes that you were unable to pay for, not for taxes evaded criminally or fraudulently.
  • Your tax debt must have been assessed at least 240 days prior to filing for bankruptcy. IRS taxes are typically assessed within six weeks of filing a tax return, so this rule is unlikely to come into play if the other time period requirements are met. California may take additional time to assess taxes.

What Happens to Tax Debt in a Chapter 13 Bankruptcy?

In a Chapter 13 bankruptcy, so long as you meet the five criteria listed above, your tax debt will be deemed a “nonpriority debt.” (unless the tax debt is secured against property) That means it will be treated like credit card or medical debt; it will be included in your Chapter 13 repayment plan and paid over the next three or five years in line with your ability to make payments. If any Non Priority tax debt remains at the end of the repayment period, it will be eligible for discharge.

If your tax debt does not meet the five criteria (such as if your tax debt was accrued within the last three years), then it will be treated as a “priority debt.” A priority debt is required to be paid in full in your repayment plan, but it will be paid first. Wage garnishment and other tax collection efforts by the Government will be halted upon filing for bankruptcy due to the automatic stay.

Build a Better Financial Future With Help From an Experienced Southern California Debt Relief Attorney

If you are dealing with mounting debt and considering debt relief options including bankruptcy, please contact Rounds & Sutter for a free, confidential consultation. With offices in Ventura, Santa Barbara and Westlake Village, we represent clients throughout Southern California, offering tried & true legal counsel in the face of life’s challenges.

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