You may hear radio commercials offering the hope of eliminating tax debts in bankruptcy. But it's not as simple as it sounds. Most tax debts can't be wiped out in bankruptcy -- you'll continue to owe them at the end of a Chapter 7 bankruptcy case, or you'll have to repay them in full in a Chapter 13 bankruptcy repayment plan.
If you need to discharge tax debts, Chapter 7 bankruptcy will probably be the better option -- but only if your debts qualify for discharge (see below) and you are eligible for Chapter 7 bankruptcy.
You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
To learn more, check out Nolo's article on Tax Debts in Chapter 13 Bankruptcy.
If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because bankruptcy will not wipe out prior recorded tax liens. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but if the IRS recorded a tax lien on your property before you file for bankruptcy, the lien will remain on the property. In effect, this means you'll have to pay off the tax lien in order to sell the property.
To find out more about which debts you can eliminate in bankruptcy, see The New Bankruptcy: Will It Work for You? by Stephen Elias (Nolo).