A bankruptcy case can wipe out or "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 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 creditor's request 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.
Remember that the automatic stay will go into effect the first time 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 IRS 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 be eliminated in a bankruptcy case.
Income tax debts are treated differently depending on whether you file a Chapter 7 bankruptcy or a Chapter 13 case.
Your case gets more complicated if the IRS has filed a tax lien. 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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