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Eliminating Tax Debts In Bankruptcy

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Chapter 7 and Chapter 13 are probably two of the most misunderstood forms of debt collection protection in the world and they are also two of the most complicated systems in the world, with ever-changing laws, bills, and codes. On the surface, filing for bankruptcy may sound like the most appealing solution to overwhelming debt, including tax debt, but if other options do exist, bankruptcy may not be the best option. Financial experts all agree that bankruptcy should never be a first choice, and instead should always be the very last resort. Why? Bankruptcy remains on your credit report for seven to ten years, and can wreak havoc with your credit and purchasing power for a long time to come.

Briefly, Chapter 7 bankruptcy, also referred to as a "straight bankruptcy," is a liquidation proceeding wherein the debtors property is liquidated (turned into cash), then distributed to the creditors. Chapter 13 Bankruptcy also, reorganization bankruptcy, is filed by individuals who want to pay off their debts over a short period of time, typically three to five years.

Some of the most common reasons for bankruptcy filings include: unexpected unemployment, unmanageable medical expenses, seriously overextended credit, marital problems, and other large unexpected expenses.

While bankruptcy can protect you from bill collectors and eventually discharge you from these types of debts, unfortunately, bankruptcy cannot protect you from the IRS. Most tax debt cannot be erased in bankruptcy. The only way tax debt can be erased with a Chapter 7 bankruptcy filing is if the following conditions exist:

The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy
You did not commit fraud or willful evasion
The debt is at least three years old
You filed a tax return at least two years before filing for bankruptcy
You pass the "240-day rule," meaning, the income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.
If you do qualify for discharge of taxes under your Chapter 7 bankruptcy, your victory is not a guaranteed win-win situation.

Chapter 7 bankruptcy does not absolve federal tax liens that were in place before the bankruptcy filing took place. While the Chapter 7 bankruptcy will take away your obligation to pay the debt, and will protect you from further collection action from the IRS, you are still obligated to pay the full amount of the tax lien before your property will be released.

If you are attempting to eliminate tax debts in bankruptcy, you will need to contact an experienced tax attorney, bankruptcy attorney, or debt collection attorney to help you file your claim and to help you understand what bankruptcy can and cannot do.

Visit the American Bar Association website to gain free access to profiles of professional tax attorneys and bankruptcy lawyers in your area.