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Bankruptcy can be a viable debt relief option that helps you discharge most or all of your debts. But what about tax debt?  

A common misconception about bankruptcy is that filing for bankruptcy does not discharge your tax debt. While not all taxes are treated as dischargeable debt in bankruptcies, you may be able to eliminate some of your tax debt if certain conditions are met.  

If you are exploring your options for eliminating tax debt, you may need to consult with a bankruptcy attorney. At Oregon Fresh Start, I assist taxpayers and debtors in dealing with tax debt throughout the state of Oregon, including Hermiston, Portland, Bend, and Eugene.  

Are Taxes Treated as Dischargeable Debt in Bankruptcies? 

While bankruptcy can be a great option to give you relief from many types of debt, taxes are not always treated as dischargeable debt. In most cases, tax debt is considered “non-dischargeable priority debt,” which means it cannot be discharged by filing for bankruptcy. Furthermore, the term “priority” means that tax debt is usually prioritized for the repayment of the debt.  

However, it may still be possible to discharge some of your tax debt through bankruptcy. Since each case is unique, you may need to consult with a skilled bankruptcy attorney to determine which tax debts can be considered as “dischargeable” debt in your bankruptcy case.  

Taxes in Chapter 7 Bankruptcy  

Generally, debtors may be allowed to discharge income tax debts through a Chapter 7 bankruptcy as long as those debts are considered “dischargeable.” Income tax debts can be eliminated when the following conditions are met: 

  • The due date for tax returns was over three years ago;  

  • The taxpayer filed tax returns at least two years ago; 

  • At least 240 days have passed from the date of the tax assessment;  

  • The tax return was not filed fraudulently; and 

  • The taxpayer did not commit tax evasion.  

Not all tax debts may meet the above-mentioned qualifications to be treated as dischargeable in a Chapter 7 bankruptcy. You may need a consultation with an experienced attorney to determine which tax debts can be eliminated through a Chapter 7 bankruptcy.  

Taxes in Chapter 13 Bankruptcy  

Chapter 13 bankruptcy has strict requirements for discharging tax debt. If some or all of your tax debts are considered “non-dischargeable,” and you file for Chapter 13 bankruptcy, you will generally have to pay them in full over the course of your repayment plan.  

In most cases, the following types of tax debt are considered non-dischargeable and priority, which means a debtor will have to pay them back after filing for Chapter 13 bankruptcy

  • Income tax debts that do not meet “dischargeable” and “non-priority” requirements;  

  • Property taxes incurred within 12 months before the bankruptcy filing date;  

  • Payroll taxes and other taxes you had an obligation to withhold/collect; 

  • Some excise taxes; and 

  • Any penalties that can be treated as “non-dischargeable” tax debts.  

While the above-mentioned tax debts may not be eliminated, filing for Chapter 13 bankruptcy can provide you with an opportunity to pay them off over three to five years. However, as with a Chapter 7 bankruptcy, you may be able to discharge income tax debt when filing for bankruptcy under Chapter 13 if it meets the requirements mentioned in the section above.   

Taxes in Chapter 11 Bankruptcy  

Unlike Chapter 7 bankruptcy, Chapter 11 does not provide as many options for discharging all or some of your tax debt. Chapter 11 bankruptcy is similar to Chapter 13 because it allows the debtor to eliminate debts with a repayment plan. The only difference between the two chapters is that Chapter 11 is for businesses and individuals who do not meet eligibility requirements to file under Chapter 13.  

Which types of tax debt and how much of it can be discharged in Chapter 11 bankruptcy depends on a number of factors, which is why you may want to work with a knowledgeable bankruptcy attorney to discuss your options for eliminating the tax debt.  

Will Bankruptcy Discharge a Tax Lien?  

If the Internal Revenue Service recorded a tax lien on your property, the lien would remain even if you file for bankruptcy. While bankruptcy cannot discharge a tax lien even if you are able to discharge some of your tax debts, the IRS will be required to stop all collection activities until after your bankruptcy case is closed, even if a tax lien is in place.  

How a Bankruptcy Attorney Can Help  

If you are considering bankruptcy as a way to discharge your tax debt, you may need to consult with an experienced attorney. As a bankruptcy attorney at Oregon Fresh Start, I can help you understand your debt relief options to help you resolve your tax debt. With offices in Bend and Hermiston, I represent clients throughout the state of Oregon. Schedule a consultation today to discuss how to deal with your tax debt. 

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