Discharging Personal Taxes in Bankruptcy

By Donald A. Hayes, Attorney at Law



Sadly this is tax season and a question often arises: can I discharge taxes in bankruptcy? The answer may surprise you, but yes you can discharge some taxes in bankruptcy depending on the type of taxes owed and other circumstances. Chapters 7 and 13 offer different forms of relief from taxes. The following is a general overview of discharging personal income taxes in Bankruptcy. In order to get a discharge of personal liability for tax obligations in a Chapter 7 Bankruptcy case: (1) the income tax return must have been first due at least three years before the bankruptcy was filed; (2) the tax cannot be assessed or assessable within the previous 240 days prior to the filing of the bankruptcy; (3) in the case of late filed returns, the tax returns must have been filed at least two years prior to the bankruptcy filing; (4) the tax return was not fraudulent and the taxpayer did not attempt to evade the tax owed.

If the tax agency has recorded a Notice of Tax Lien with the County Recorder then the tax debt will be considered a secured debt and a lien on the debtor’s real property. In this instance, although the personal liability of the tax debt may be discharged, the lien still remains attached to the real property. The tax agency cannot now attempt to enforce the tax debt against you personally by garnishing your wages etc. However the lien will have to be repaid when the property is sold or refinanced, and only then if the property is not over encumbered with other more senior liens.

In Chapter 13, the dischargeable taxes may be treated as unsecured debts that do not bear interest or penalties. They may or may not be repaid through the Plan along with other unsecured creditors at a deep discount. The amount you must pay toward the unsecured amount is dependent on your income and budget so what you propose will vary. At the conclusion of your case the entire tax obligation will be considered discharged forever. Any taxes that are not dischargeable taxes are considered “priority debts” and must be repaid in full through the Plan.