Does Bankruptcy Clear Taxes?
If you’re wondering does bankruptcy clear taxes, you’ll need to know a few things before you can decide. This article helps to answer the question “Does bankruptcy clear taxes”, and we hope it’s helpful. We’re available to discuss this issue with you at no charge—simply call us at 704.749.7747 or click to request a FREE BANKRUPTCY CONSULTATION.
Taxes In Chapter 7 Bankruptcy
The desired result in a Chapter 7 is a Discharge. The discharge means the debt goes away in bankruptcy. In order to receive a discharge of taxes in Chapter 7, a few things need to be true:
- Your taxes must be at least 3 years old. This is usually the main obstacle. The age of the taxes depends upon the first date they were due. For instance, taxes for 2017 were first due April 15th, 2018. As of April 15th, 2021, those taxes turned 3 years old. If you received an extension on filing until October 15th of 2017, that would be your date to use as the starting date.
- Only Income Taxes are covered. Some clients owe Sales and Use tax to the federal government. That type of tax is not discharged in bankruptcy. Only income tax is eligible to be discharged.
- Tax returns must be filed. The date for filing the tax return related to the tax debt is 2 years before filing the bankruptcy. In the example above, even though the taxes are 3 years old, if you had not filed a tax return for those taxes until 1 year before filing bankruptcy, you would not receive a discharge of those taxes.
- 240 Day Rule. There is a 240 day rule. Simply put, if the IRS assessed the tax, they must have done so at least 240 days before you file bankruptcy.
So, does bankruptcy clear taxes? Well, if all of the conditions above are met, the answer should be YES. One exception relates to an IRS LIEN FOR TAXES. Chapter 7 will not extinguish an IRS lien. So, even if the taxes are cleared by bankruptcy, you’ll still be left with a tax lien which attaches to real estate you own. When that real estate is sold, the tax lien will still need to be paid.
Filing Taxes Before Bankruptcy
While filing your taxes before bankruptcy is often necessary, you can easily see that the 2 year rule will be in violation and would keep some taxes from being cleared in bankruptcy. In order to file Chapter 7, you must have filed taxes for the 2 prior years before filing bankruptcy. That requirement has to be met whether those taxes will be discharged or not by bankruptcy.
Does Bankruptcy Clear Taxes In Chapter 13
One solution for taxes which won’t be cleared in Chapter 7 is to file Chapter 13. In Chapter 13, your existing tax debt which does not meet the requirements above, will be paid back to the IRS on a 5 year plan, with very low or no interest, and without penalties. Your Chapter 13 plan will also discharge taxes which do qualify above, together with other unsecured (credit cards, medical bills) debt. Chapter 13 is also routinely used to catch upon on missed mortgage or car payments. We’re happy to discuss Chapter 13 with you if you like.
Does Bankruptcy Clear Taxes On The Day I File?
No. The taxes are not cleared until you receive your discharge. In a Chapter 7, this means the trustee must close the case after reviewing it, and the court must enter your discharge. Typically, you receive your discharge about 120 days after filing your bankruptcy. Soon after filing, you will attend your 341 meeting with our attorney.
Speak With A Lawyer About Taxes In Bankruptcy
If you’d like to get clarity about anything in this article, or speak with an attorney about your bankruptcy options, simply call us at 704.749.7747 or click to request a FREE BANKRUPTCY CONSULTATION. We know you have options. We hope you choose to Recover With Us.