Income Tax Debt in Chapter 7 Bankruptcy

Most tax debts won't be wiped out by Chapter 7 bankruptcy, but some older tax obligations might.

Updated By , Attorney · University of the Pacific McGeorge School of Law

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:

  • the tax is old enough
  • you didn't commit tax fraud
  • you meet all other rules imposed by your court jurisdiction, and
  • the taxing authority hasn't put a lien on your property.

Learn about the differences between Chapters 7 and 13.

Nondischargeable Income Tax Debt in Chapter 7 Bankruptcy

Many debts get wiped out in Chapter 7, but not all. Income tax debt is considered a vital debt that a debtor should repay, so it's classified as a nondischargeable priority debt.

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.

How to Discharge Income Tax Debt in Chapter 7 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:

  • The tax return for the debt you wish to discharge was due at least three years before your bankruptcy filing date (taking into account any extensions you received).
  • You filed a tax return for the debt at least two years before your bankruptcy filing date (although some jurisdictions won't wipe out tax debt if you filed a late return).
  • The tax debt has not yet been assessed (determined) by the IRS or was assessed at least 240 days before you filed for bankruptcy (the 240-day limit can be extended).
  • You didn't file a fraudulent tax return or otherwise engage in willful tax fraud or evasion.

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.

But…Tax Liens Don't Go Away

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.

Consult With a Bankruptcy Lawyer

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.

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