A bankruptcy case can wipe out (discharge) older income tax debt that meets qualification guidelines. It can also give you a way to pay back recently assessed taxes at a payment amount lower than what the IRS would offer. In this article, you'll learn more about how bankruptcy can help with your IRS debt.
When you file a bankruptcy case, an injunction (a type of court order) called the automatic stay goes into effect to stop creditors, including the IRS, from starting or continuing collection activity, like sending you letters, garnishing your wages or your bank account, or filing liens against your property.
The stay continues during the bankruptcy case. It can be lifted only by the bankruptcy court after a request by the creditor (and only for a good reason).
Once the bankruptcy case is over, the IRS will be free to resume collection activity unless the tax debt has been wiped out (discharged) or paid in full.
Keep in mind that the automatic stay will go into effect the first time that you file for bankruptcy. However, that's not always the case for subsequent filings. You could lose the stay if you've had repeated bankruptcy filings.
Debtors can discharge some tax debt in bankruptcy, but not all. Taxes must meet the following criteria before being forgiven:
If you meet all of these factors, the chances are that your tax debt will be dischargeable. If not, your tax obligation won't go away in a bankruptcy case.
Income tax debts are treated differently depending on whether you file a Chapter 7 bankruptcy or a Chapter 13 case.
If the IRS has filed a tax lien, your case gets a little more complicated. A tax lien will turn the tax debt into a secured obligation that must be repaid regardless of the chapter you file—even if the tax is old and would have otherwise been dischargeable.
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