How Bankruptcy Impacts Your Tax Debt: What to Know Before You File

Filing for bankruptcy can help you eliminate many types of debt. But what about tax debt? The answer isn’t simple. Some tax debts can be wiped out. Others stay with you even after your case ends. Knowing the difference matters before you file.

Here’s what you need to know about how bankruptcy affects tax debt.

Not All Tax Debts Go Away

Bankruptcy can discharge certain income tax debts. But the debt must meet specific rules. If it doesn’t, the IRS will still expect full payment, even after bankruptcy.

To qualify for discharge, your tax debt must meet these five conditions:

• Taxes are income taxes. Other taxes, like payroll taxes or fraud penalties, don’t qualify
• You filed a tax return. You must have filed the return for the year in question
• Tax return was filed at least two years before filing for bankruptcy
• Tax debt is at least three years old
• IRS assessed the debt at least 240 days before filing

If your tax debt meets all five rules, it might be eliminated through bankruptcy. But if any rule isn’t met, the debt stays.

Chapter 7 vs. Chapter 13 and Tax Debt

Chapter 7 is a quick process. It usually takes a few months. If your tax debt qualifies, it can be discharged just like credit card or medical debt. But if it doesn’t qualify, it remains after the case closes.

Chapter 13 works differently. It creates a repayment plan. You pay what you can over three to five years. Even if your tax debt can’t be discharged, Chapter 13 helps by stopping penalties and interest. It also prevents the IRS from garnishing your wages or seizing property during your case.

Tax Liens Survive Bankruptcy

A federal tax lien can survive even if the tax debt is discharged. A lien is a legal claim on your property. If the IRS recorded a lien before you filed, it stays attached to your assets. Bankruptcy won’t remove it.

That means the IRS could still collect from the value of your home, car, or other property. It’s important to address tax liens before or during your bankruptcy planning to avoid this.

You Still Need to File Returns

Filing for bankruptcy doesn’t cancel your duty to file tax returns. The bankruptcy court may dismiss your case if you don’t stay current. You must also keep filing returns during a Chapter 13 repayment plan. Missing returns or payments can cause serious problems in your case.

Bankruptcy Stops IRS Collections—Temporarily

When you file for bankruptcy, something called the automatic stay takes effect. This stops the IRS from collecting taxes, garnishing wages, or freezing bank accounts. But it’s only temporary.

Once the case ends, the IRS can return to collecting unpaid taxes that weren’t discharged. That’s why knowing what tax debts will still exist after bankruptcy is essential.

Talk to a Professional First

Tax laws and bankruptcy laws are complex. The rules that decide whether your tax debt can be discharged are strict. Mistakes can cost you thousands of dollars.

An experienced bankruptcy attorney can review your situation. They’ll look at your tax records, dates of assessments, and returns. They can help you choose the best chapter to file. And they’ll explain how to handle tax liens and repayment plans.

Ready to Move Forward?

If tax debt holds you back, don’t wait. Bankruptcy might be the solution—but only if you understand the rules. The proper guidance can protect your income, assets, and peace of mind.

If you’re concerned about tax debts or other debt, we can help. For more information or to schedule a consultation to discuss your situation, contact R. Flay Cabiness, II, P.C. at (912) 417-5041 (Brunswick, GA); (912) 809-2141 (Hazlehurst, GA) or; (912) 324-3176 (Jesup, GA) to schedule a consultation.