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Discharge of Taxes in Bankruptcy

Eliminating your federal income tax debt in a NYC area Chapter 7 bankruptcy

Many of our new clients ask the same question: Does bankruptcy erase tax debt?  The short answer is some, but not all taxes may be discharged in a Chapter 7 bankruptcy.

Chapter 11 or Chapter 13 bankruptcies do not allow for discharging taxes in bankruptcy. However, those forms of bankruptcy can provide individuals and businesses with debt relief by setting up a payment plan to repay back taxes over time.

That leaves Chapter 7 as the only way to discharge taxes in bankruptcy.

Eligibility requirements to discharge federal income tax debts

For your tax debt to be discharged in bankruptcy, you must meet all five of these requirements:

  • The tax debt must be income taxes. No other type of tax qualifies for discharge.
  • You must not have previously tried to evade paying the tax or committed fraud to avoid paying.
  • The tax debt must be at least three years old. Income tax that became due within the past three years is not dischargeable.
  • You filed income tax returns for the tax debt you want discharged and those returns were filed at least two years prior to the bankruptcy filing.
  • Taxes assessed by the IRS, such as following an audit or an IRS modification of your income tax return, are dischargeable after 240 days (eight months) have elapsed after assessment.

Recorded tax liens are not released by bankruptcy

Even if all five eligibility requirements are met and your tax debt is discharged in your Chapter 7 bankruptcy, you may still be required to pay the debt in the future if the IRS had obtained a lien on your real property prior to the discharge.

The bankruptcy discharge eliminates your personal obligation to repay the debt so the IRS cannot seek collection by garnishing your wages or levying your bank accounts. However, if the IRS had placed a lien on your home prior to the discharge, that lien is unaffected by the bankruptcy discharge. When the time comes for you to sell your home, you will have to pay the tax debt to have the lien removed unless you are doing a short sale. If your mortgage lender approves a short sale of your property, the lender will allow the tax debt to be paid off from the proceeds of the sale.

Let an experienced NY bankruptcy attorney help you file for bankruptcy

If you live in New York City and think bankruptcy may be a viable option for you, contact the Law Office of Gregory Messer online or at 718-717-2368 to schedule a free initial consultation. Our office is located across the street from the U.S. District Bankruptcy Court in Brooklyn and is close to the Borough Hall and Court Street subway stations. We serve residents throughout Brooklyn, Bronx, Manhattan, Staten Island and Long Island.

To ensure every client’s filing receives the attention it deserves, we are an appointment-only law firm with flexible hours adjustable to fit your needs.

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