Typically, you can’t eliminate income tax liability by filing for Chapter 7 bankruptcy, but an exception exists. Chapter 7 can wipe out an obligation to pay income tax debt if:
Learn about the differences between Chapters 7 and 13.
Priority debts get pushed higher up on the debt-repayment ladder. If money is available to pay creditors in a Chapter 7 case, priority debts get paid before most other debts. You’ll also remain responsible for any remaining balance after your bankruptcy case ends—the amount owed won’t be discharged. Learn more about the differences between priority and nonpriority claims in bankruptcy.
Even though discharging an income tax debt is difficult, if a tax debt is sufficiently old enough, it can get wiped out if you satisfy all of the following requirements:
If you have an older tax debt you think you might be able to get rid of soon, check with a bankruptcy lawyer. It might make sense to delay filing your case until you satisfy all of the time limit requirements above.
If the IRS has already placed a lien on your property, you’re out of luck. Even if you can discharge an income tax obligation, the discharge only wipes out your liability for the debt—the lien will not go away. So even though the IRS won’t be able to garnish your wages to collect the discharged tax debt, you’ll need to pay off the lien when you sell the property.
If you have a lien on your property or filing for Chapter 7 won’t be beneficial, other options exist. For instance, you can pay off the tax debt over three to five years in a Chapter 13 case. A local bankruptcy lawyer can explain your options and help you make a solid financial decision.