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Does Bankruptcy Help With Tax Debt?

Debts come in all forms from student loans to consumer debt, mortgage loans to medical bills, and even overwhelming tax debt. Many debtors find relief from debts by filing for bankruptcy, including either a full discharge of eligible debts or a plan to repay certain debts with the remainder being discharged. While bankruptcy provides relief from many debts, not all debtors qualify for a discharge of tax debts, and it is important to understand how bankruptcy can affect your taxes.

When filing for bankruptcy, certain debts generally cannot be discharged. Examples include child support, student loans and fines from commission of a crime, among other debts.  In addition, tax debt, such as fraud penalties, federal tax liens, recent property taxes, certain required withholdings, certain tax penalties and erroneous tax refunds are often nondischargable. That said, certain taxes may be discharged when they meet the rules for tax debt discharge:

  • Your taxes are income taxes
  • You did not commit fraud in your tax return or willfully evaded paying taxes
  • The tax return was originally due three years before your bankruptcy filing
  • You filed your tax return at least two years before filing for bankruptcy
  • The tax assessment is at least 240 days old before you file your petition or has not yet been assessed

While bankruptcy does not stop an Internal Revenue Service audit, it does stop collection actions and can help many debtors get back on their feet by reorganizing and discharging debts. It can also provide you with an option to repay the tax interest free.  If you are considering filing for bankruptcy because of overwhelming taxes or other debts, a knowledgeable bankruptcy lawyer can help you analyze your debts, choose your best debt relief option and guide you through the bankruptcy process.

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