When Can a Tax Debt Be Discharged?
There are various myths surrounding bankruptcy. One of the most common questions people often ask is, can my IRS debts be discharged if I file for bankruptcy? Sometimes, they may not ask and assume filing for bankruptcy will automatically wipe out their IRS debts. Unfortunately, the bankruptcy law has certain restrictions that allow only certain kinds of taxes to be discharged.
Although a tax debt is more likely to be discharged in Chapter 7 than Chapter 13 bankruptcy, sometimes taxpayers can find themselves in the worst situation after filing for bankruptcy if they did not obtain proper information. Some taxes are chargeable in bankruptcy if the following conditions are not met:
Debts that cannot be discharged in Chapter 7 bankruptcy:
Tax liens. When all of the above conditions are met, the IRS will discharge your personal income tax obligations. However, all assets that a lien is attached to are still subject to collection, since bankruptcy does not usually release IRS tax liens. This rule applies only to tax liens recorded against your property before you file for bankruptcy. The IRS may still be able to execute on its tax lien or any property acquitted at a later date. In effect, this means you’ll have to pay off the tax lien in order to sell the property. Every taxpayer’s situation is different, and before filing for bankruptcy, we strongly recommend a taxpayer schedules a FREE consultation to learn the pros and cons.