Can Income Tax Debt Be Discharged in Chapter 7?
Thinking about filing a tax return leads many Californians to think about filing something else, too: a Chapter 7 bankruptcy petition. But when can Chapter 7 help with income tax debt? And is filing for bankruptcy a potential solution for other tax-related debts as well?
To answer these questions, we need to start by explaining the difference between dischargeable and non-dischargeable debt. Put simply, a dischargeable debt is any debt for which the filer will no longer be liable when his or her case is discharged. The debt itself continues to exist, but the filer can no longer be pursued by the creditor or debt collectors. Common examples of dischargeable debts in a Chapter 7 bankruptcy include medical debt, credit card debts, and debt from personal loans.
In contrast, non-dischargeable debts are debts for which the filer remains liable, even after his or her case has been discharged successfully. In other words, the filer will still be responsible for paying the debt, regardless of the discharge.
Income tax debts are generally non-dischargeable in Chapter 7 bankruptcy, but there are also a few exceptions that allow for certain tax-related debts to be eliminated. The standards you will need to meet in order to eliminate income tax debts are explained in the next section.
5 Requirements to Eliminate Tax Debt in Bankruptcy
You might be able to discharge tax debt if all five of the following facts are true:
1. The debt is an income tax debt. Federal income tax debt is the only type of tax debt that can be discharged in Chapter 7 bankruptcy. For example, you cannot discharge debts related to payroll taxes. But the nature of the debt isn’t the only important factor; the age of the debt is also critical. You can only discharge income tax debt if…
2. The debt is from at least three years ago. If the debt is less than three years old, it cannot be discharged.
3. The debt meets the 240-day requirement. In addition to being due at least three years prior to the date on which you intend to file for bankruptcy, the debt must also be able to pass another time requirement called the “240-day rule.” This rule requires that the IRS assessed the debt at least 240 days before the date you file for bankruptcy. (For quick reference, 240 days is just under eight months.) Having prior bankruptcies in your past can affect the 240-day rule, as well as other critical aspects of bankruptcy (such as the duration of the automatic stay), so it’s particularly important to review your situation with a Chapter 7 bankruptcy lawyer if you’ve filed for bankruptcy on a previous occasion.
4. You already filed a federal income tax return. The third time requirement is that you filed a tax return for the debt you want to discharge a minimum of two years before the date on which you plan to declare bankruptcy. Meeting this requirement is more complicated if you filed your tax return late–in which case, you are strongly advised to discuss your filing date with a Folsom Chapter 7 lawyer from The Bankruptcy Group.
5. You did not commit tax evasion or other forms of fraud. If you committed tax evasion, concealed income in offshore bank accounts, or committed or attempted to commit any other types of tax fraud, the bankruptcy court will not grant you a discharge.
Again, you must be able to meet all five of these criteria in order to eliminate income tax debt in Chapter 7 bankruptcy.