Guiding You Toward A Brighter Financial Future

Can people ever discharge income tax debt through bankruptcy?

On Behalf of | May 12, 2024 | Bankruptcy

Bankruptcy is often an individual’s last resort when they’re facing serious financial hardship. People who worry about vehicle repossession or home foreclosure may file for personal bankruptcy. Lender lawsuits or unbalanced budgets could also convince people to pursue a bankruptcy filing.

Personal bankruptcy cases extend people the protection of an automatic stay. Creditors have to temporarily stop trying to collect on an individual’s debts until the courts resolve the bankruptcy case. If the bankruptcy filing is successful, the filer can receive a discharge of their eligible debts.

Oftentimes, medical debt or credit card balances push people into considering bankruptcy. However, tax debts can also create a lot of strain on someone’s budget. Is it ever possible for an individual with substantial income tax debt to discharge what they owe to the Internal Revenue Service (IRS)?

Tax debts are subject to special rules

While people often prefer black-and-white answers to questions, many legal matters involve a lot of gray areas. That is certainly true when an individual wants to file for personal bankruptcy because of income tax debt. As a general rule, most tax debts are not eligible for discharge during bankruptcy. Income tax debts are perhaps the only tax obligations that bankruptcy can help people address. Even then, there are strict rules that apply to income tax debts during a personal bankruptcy filing.

Tax debts related to underpayments in recent years are likely ineligible for discharge. Only income tax debts that are at least three years old or older are eligible for inclusion in a bankruptcy filing. If someone has old tax debts from several years ago, they may be able to discharge those debts as part of a successful personal bankruptcy filing. In some cases, particularly when people file for Chapter 13 bankruptcy, it may be possible to cooperate with the IRS by establishing a payment arrangement.

For many people, the discharge of other debts during bankruptcy is what may help them resolve their income tax obligations. Eliminating credit card balances and medical debts can free up more of someone’s income to pay toward their income tax debts. Reviewing current financial obligations with a knowledgeable legal team can help people better establish what debts they can resolve with a personal bankruptcy filing, such as older income tax debts.