Many people who are filing for bankruptcy wonder if they are able to have back owed income taxes discharged during the bankruptcy process. The short answer is: Maybe.
The type of bankruptcy you are filing will determine whether you can include back owed income taxes in your bankruptcy, or not. Educating yourself on the different items that can – and cannot – be included in your bankruptcy filing can help you make the most informed decision about your finances, and determine whether it really is economically wise to proceed with such a drastic step.
Back Owed Income Taxes and Chapter 7 Bankruptcy
In most cases, all income tax debts are discharged when you file Chapter 7 bankruptcy, but other taxes such as payroll tax will still be owed.
Income taxes must meet all of the following requirements if they are to be discharged when filing a Chapter 7 bankruptcy:
They are solely income taxes – no payroll taxes, trust fund taxes, or any type of debt you’ve accumulated because of a penalty from fraud
Taxes were assessed a minimum of 240 days before you filed for bankruptcy
The taxes are due three years from the date of your bankruptcy filing
Your tax returns were filed at least 2 years before filing for bankruptcy
You have not committed any type of fraud or are guilty of tax evasion
You have proof that you filed your tax returns for the last four years
Back Owed Income Taxes and Chapter 13 Bankruptcy
When you file for Chapter 13 bankruptcy, only some of your back taxes may be discharged and most have to be repaid over the next three to five years. You will be set up with a repayment plan that usually runs three years, unless you are making less than the state median income, in which case it will be about five years.
Income taxes must meet all of the following requirements if they are to be discharged when filing a Chapter 13 bankruptcy:
You do not have secured debts of more than $1.01 million
You do not have unsecured debts of more than $337K
Your tax returns were field at least 4 years before filing for bankruptcy
You’re not including business taxes in the filing
You are disclosing all of your assets, liabilities and income and are not guilty of any fraudulent activities
You are still paying all taxes with a lien filed against them
You are submitting a Statement of Financial Affairs
You agree to pay court filing fees and taxes from the previous year
You have completed credit counseling with a Federal government agency
You have completed a comprehensive budget analysis
You are able to pay at least $100 a month for the next 5 years
You agree to submit a payment plan proposal to the court for review
As you can see, it’s not very easy to have your income taxes discharged when you are filing bankruptcy.
It is in your best interest to work with a bankruptcy attorney to determine what types of debts can be discharged, and what you need to do to request a discharge of income taxes owed.