Many individuals, including accountants and lawyers, are under
the misconception that taxes are not dischargeable in bankruptcy. Nothing
could be further from the truth. Although there are a number of technical rules
that can trap the unwary, most tax liabilities are dischargeable.
There are two basic types of tax bankruptcy available
to average taxpayer: liquidation under Chapter 7 and wage earner plans under Chapter
13. In Chapter 7 all of taxpayers assets and liabilities are marshaled. All assets,
except certain exempt assets are liquidated and paid to creditors in the order specified
by the bankruptcy code. To the extent non-exempt assets are insufficient to pay
all creditors, most of the unpaid debts are forgiven; i.e., theyare discharged
Generally, all income taxes, both Federal and State taxes
may be discharged if they are old enough. In the case of the income taxes,
they are dischargeable in Chapter 7 if all of the following criteria are met.
- The tax is for a year for which a tax
return is due more than 3 years prior to the filing of the bankruptcy petition;
- A tax return was filed more than two years prior to the filing
of the bankruptcy petition;
- The tax was assessed more than 240 days prior to filing of the
- The tax was not due to a fraudulent tax return, nor did the taxpayer
attempt to evade or defeat the tax;
- The tax was not assessable at the time of the filing of the bankruptcy
- The tax was unsecured
Click here for Tax Bankruptcy help!