Taxes in Bankruptcy

There is a general misconception that taxes cannot be discharged in bankruptcy. Although there are a number of technical rules to be mind and thoroughly followed, most tax liabilities are dischargeable. 

Bankruptcy is the last resort for dealing with delinquent tax bills. There are two basic types of bankruptcy available to average taxpayer to discharge delinquent taxes: liquidation under Chapter 7 and wage earner plans under Chapter 13. In Chapter 7 all of bankrupt taxpayer's assets and liabilities are marshaled. All assets, except certain exempt assets, are liquidated and distributed to creditors in the manner specified by the bankruptcy code. If non-exempt assets are insufficient to pay all creditors, most of the unpaid debts are forgiven; i.e., they are 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 bankruptcy petition;
• 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 petition; and
• The tax was unsecured.

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Tax Bankruptcy related links
Back taxes in bankruptcy at TaxHelpers.com
Tax bankruptcy at MyTaxProblem.com