Bankruptcy and Tax Debt: What You Need to Know

In 2021, Americans failed to pay a record $688 billion on their tax returns. 23% of Americans have fallen behind

If you fall within that 23%, then bankruptcy can be an avenue for eliminating some of your tax debt, though not necessarily all of it. 

However, tax debt is a bit more complicated than other types of debt, and getting it discharged comes with more conditions.

Property Tax Debt

You generally can’t discharge property tax debt in bankruptcy.

New York State Tax Debt

To discharge New York State tax debt, you must:

  • File a Chapter 7 or 13 bankruptcy
  • The taxes must be three years old or older
  • The assessment or payment of the taxes must involve no fraud
  • The assessment of the debt must be at least 240 days before you file.

An offer-in-compromise with the IRS could impact your ability to discharge your New York State tax debt. In addition, you may still owe certain taxes or fees associated with the debt. 

If you can’t discharge New York State tax debt, you may be able to work out an offer in compromise instead. 

Federal Tax Debt

To discharge federal tax debt:

  1. The debt must be over three years old.
  2. Your returns must be up to date.
  3. You must not have committed fraud.
  4. You must not have “restarted the clock” on the tax debt with an offer-in-compromise, which adds 30 days to your 240 days (see rule 6).
  5. There must be no lien on your property.
  6. The IRS must assess the debt at least 240 days before you file. 

If you are filing Chapter 7 and are owed a refund, you will either need to protect it with bankruptcy exemptions, or the trustee will seize it to pay your creditors. If you receive the refund shortly before you plan on filing for bankruptcy, do not spend it on luxuries. Instead, spend it on necessities and keep the receipts. 

Get Help Today

Even if we can’t discharge all of your tax debt, receiving bankruptcy relief can still help you. 

For example, we may be able to help you free up more monthly funds so you can pay your taxes. 

If you’re struggling financially, contact us for a free consultation so we can explore your options. 

See also:

What Happens to Tax Refunds During Bankruptcy?

How to Prepare for Your Free Bankruptcy Consultation

When Does It Become Absolutely Critical to File for Bankruptcy?


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