Does Bankruptcy Erase Tax Debt?

The personal bankruptcy process is a way for those experiencing severe financial difficulties to wipe their debts and start again.  But does bankruptcy erase tax debt?

Some may be surprised by the fact that while filing for bankruptcy does not wipe out federal housing or education loans, it does erase tax debt, providing that certain conditions are met.  As well as having filed an honest, non-fraudulent tax return and not intentionally attempting to evade paying your taxes, there are three other criteria that must be met in order for taxes to be considered eligible for discharge.

•    3 years must have passed from the date the taxes were due to the date of petition filing.
•    2 years must have passed from the date the taxes were filed to the date of petition filing.
•    240 days must have passed from the date the taxes were assessed to the date of petition filing.

If these conditions are met, your IRS, state, and local taxes may be discharged under Chapter 7 of the U.S. Bankruptcy Code.  However, it is important to note that if the federal government has placed a lien against your property due to unpaid taxes, those taxes cannot be discharged.

Chapter 13 operates slightly differently as taxes are considered a priority and are listed at the top of the list of creditors to be repaid as part of your 3-5 year plan.  However, if your situation meets the 3 year and 240 day criteria, the judge may reduce the amount of tax you owe.  In addition, if the value of your assets or property has dropped below that of the lien against them, then the lien will be reduced to reflect that reduction in value.

Does going bankrupt erase tax debts?

Yes.  As long as you meet the criteria and file for personal bankruptcy protection under Chapter 7.