Do I have to Repay Tax Debt before I File?

What happens to unpaid taxes during bankruptcy.

Unpaid tax debt is unique, especially when it comes to bankruptcy. But don’t worry – that doesn’t mean that you have to repay money you owe on your taxes. You can file for bankruptcy no matter what kind of debt you owe, even if it’s back taxes to the IRS. In fact, like most debts, bankruptcy may provide you with a way out of your tax debt problems.

The information below can help you understand what happens to tax debt when you file for bankruptcy. If you have questions or want to talk to an expert about your situation, call us or complete the form to the right to connect with a tax or bankruptcy specialist… or both.

Tax debt in Chapter 13 bankruptcy

If you plan on petitioning for Chapter 13 bankruptcy where you get the courts to agree to a partial repayment plan of your debts in exchange for a discharge of the remaining balances, then your tax debt will usually be included in that plan. At least some of the payments you make will be used to settle up with the IRS or the tax office of your state.

So don’t worry about paying tax debt back in-full before you file for Chapter 13, because your plan will include the means to settle your issues.

Tax debt in Chapter 7 bankruptcy

With Chapter 7 bankruptcy, things get a little more complicated. IRS tax debt can be discharged through bankruptcy, but only if you meet the following criteria:

  • It’s income tax debt.
  • You filed a legitimate tax returns in the two years prior to your bankruptcy filing.
  • The debt is at least 3 years old.
  • The IRS assessed the debt at least 240 days before you file for bankruptcy.
  • You didn’t knowingly and willfully commit tax evasion or fraud.

If you meet those five criteria, then you can discharge tax debt through Chapter 7 bankruptcy. The discharge will also include penalties and interest generated by that debt.

Other taxes owed (like payroll) cannot be discharged during bankruptcy, nor any penalties generated from those kids of taxes. You can still file for bankruptcy and have your other debts discharged, but you will still owe the other taxes and must repay them.

Discharge doesn’t eliminate liens

If you have a federal tax lien placed on any property because of back taxes that you owe, the discharge of that debt during bankruptcy won’t remove the lien. The debt is repaid so the lien can be removed immediately after discharge, but you have to take the right action to clear the lien. Make sure to do this as quickly as possible, so you don’t have issues when you try to sell.