The personal bankruptcy process is an excellent way to discharge unsecured debt such as medical bills, credit cards, etc. Surprisingly, discharging tax debts in bankruptcy is also possible as long as certain criteria are met.
If you opt to file for bankruptcy under the traditional liquidation concept of Chapter 7 of the U.S. Bankruptcy Code, the taxes you wish to discharge must meet the following requirements:
• Your tax returns must have been due at least 3 years before the petition date.
• Your tax returns must have been filed at least 2 years before the petition date.
• You tax amount owed must have been assessed at least 240 days before the petition date.
If you decide on filing under Chapter 13 with a repayment plan lasting 3-5 years and requiring that you pay creditors 0-100% of the debts owed to them, your taxes only need to meet the following requirements:
• Your tax returns must have been due at least 3 years before the petition date.
• You tax amount owed must have been assessed at least 240 days before the petition date.
Keep in mind that if you are so behind on your taxes that the government has put a lien against your property due to unpaid taxes, your only possible option is to file under Chapter 13. If the value of your assets has dropped to less than the amount of the lien, a judge may either reduce the lien to equal the current value of the asset or extinguish it completely when the bankruptcy is finalized.
Discharging tax debts in bankruptcy is fairly easy if the tax returns in question meet the specified requirements so make sure you pay careful attention to the calculations of the dates because if you are one or two days shy of the cut-off period, they will not be discharged. However, don’t think that you can claim for bankruptcy solely to get rid of your unpaid taxes as that may be considered fraudulent. You must have filed an honest tax return and made efforts to pay the taxes owed before filing your petition for personal bankruptcy.