Published on: April 18, 2019 Last modified: May 15, 2020

Chapter 7 or 13: Does Bankruptcy Clear IRS Debt?

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    Are the feds chasing you for past IRS debt? 

    Maybe you have a hefty debt you are trying to chip away at. It doesn’t seem to be going away. 

    It would be such a huge weight off your shoulders if you could start fresh

    You are now considering bankruptcy. But you are wondering, “Does bankruptcy clear IRS debt?”

    The main answer is…sometimes it can. 

    While a Chapter 7 bankruptcy filing assists in discharging most debt, it would be a mistake to automatically assume it will discharge tax debt in every circumstance. Whether tax debt is dischargeable depends on a number of factors.

    Determining whether it is possible to discharge tax debt is dependent upon the type of tax relative to the kind of bankruptcy. What are called “stale” tax debts generally are dischargeable, but the same is not true for “fresh” debts. Also, there is to be no discharging of tax debt if there was a failure to file the appropriate tax returns.

    Here’s what you need to know to find out if filing bankruptcy can clear away your tax debt with the IRS. 

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    Different Types of Bankruptcy 

    Different chapters of bankruptcy work differently. Depending on which one you file, you may be able to clear your IRS debt with bankruptcy.   

    There are several types of bankruptcy you can declare. The two main types are Chapter 7 and Chapter 13.

    To more accurately answer the question: “Does bankruptcy clear IRS debt?” you need to understand how each type of bankruptcy works. 

    First, when you file, an automatic stay goes into effect. This means that debtors are no longer allowed to collect the debt until the process is over. This includes IRS tax debt.  

    You may be able to avoid declaring bankruptcy due to a huge tax debt. It’s important to find a great tax attorney

    A few things to remember if you want to include IRS tax debt in bankruptcy:

    • You must have filed taxes within 2 the past two years.
    • You can’t have purposely committed tax fraud to evade paying taxes.
    • They must be wage-related or business income taxes.
    • It must have been at least three years since your taxes that you are listing were due.
    • Your tax bill must have been billed 240 days ago more.
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    Chapter 7 Bankruptcy and the IRS

    Chapter 7 bankruptcy is when a total discharge of debts can occur. This means that when you include all of your debts, most of the time (unless there is a dispute from a creditor) you can “erase” your debts. 

    This is not the case with some debts. For example, student loans and child support cannot be erased. But almost all other debts can. 

    Your discharge decision will be based upon your income, assets, and exemptions.

    This includes past IRS debt and taxes. There are some stipulations though. 

    First of all, you can list income taxes with the IRS on your Chapter 7 bankruptcy. But payroll taxes will not be discharged. 

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    Chapter 13 Bankruptcy and the IRS

    Chapter 13 bankruptcy works with your creditors and basically puts you on a payment plan for your debts. They are not completely erased, although some may be reduced. 

    Chapter 13 payment plan may help you manage IRS debt, but not get rid of it completely. Your payment plan will be based on your income, assets, and bankruptcy exemptions. 

    The court will determine whether your tax debt is a “priority” or “nonpriority.” This will determine if and what you have to pay back with past debts. 

    The payment plan is with the bankruptcy court, not the IRS with a Chapter 13 bankruptcy. 

    In order to file a Chapter 13 bankruptcy, all required tax returns within the four years of filing must be filed. 

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    Does Bankruptcy Clear IRS Debt? The Simple Answer

    The simple answer here is: 

    Sometimes. 

    If a Chapter 7 bankruptcy is discharged, the IRS tax debt listed will likely be erased if all the criteria are met.

    If a Chapter 13 bankruptcy is discharged, the IRS tax debt may be reduced greatly if the criteria are met. In this case, the remaining debt will be placed on a payment plan with the bankruptcy court. 

    If it is not discharged or placed in a Chapter 13 payment plan or you stop paying on the plan, the collection can continue. The IRS will still be there waiting. 

    They don’t forget about an owed tax debt. 

    A chapter 7 will be the better option to clear or erase a tax debt with the IRS. 

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    Considering Other Options

    Even with a large IRS tax debt, you may be able to avoid declaring bankruptcy. 

    You should consider a few things. Think of the big picture. 

    Do you owe a lot in other debt, too? If your IRS debt is coupled with other large amounts of debt, that is something to consider. 

    The good news about the IRS is that they will allow you to pay on a payment plan anyway. So if you file a Chapter 13 bankruptcy just to get on a payment plan, you may be able to save the headache and contact the IRS directly yourself. 

    Also, consider this:

    Sometimes it can help to contact a tax attorney before deciding to file bankruptcy. You may be able to get your debt reduced or resolved easier. 

    Remember that bankruptcy is not a quick fix. It is often time-consuming and emotionally draining. 

    It doesn’t take into account that you may end up owing taxes again in the future. 

    So, take the time to learn about how to pay and file taxes so you don’t make the same mistakes. 

    Or consult a professional to help you. 

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    Concluding the Tax Debt Debate

    We have finally answered the epic question.

    Does bankruptcy clear IRS debt? 

    The answer is, it can. But you need to know the facts in order to make an educated decision.

    Take time to educate yourself or consult a professional to decide if bankruptcy is the right choice for you. 

    We can help you decide if bankruptcy is the right choice for you. 

    Contact us today for a free consultation!

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