Tax debt can be one of the most stressful financial burdens a person faces. Many people assume that taxes can never be eliminated in bankruptcy, but that’s not always true. In certain situations, bankruptcy can reduce or even eliminate tax debt—or at least stop aggressive collection actions.
Understanding how tax debt is treated in bankruptcy can help you decide whether filing is the right move.
Can Tax Debt Be Discharged in Bankruptcy?
Some income tax debts may be discharged, but only if strict requirements are met. Other types of tax debt—such as payroll taxes or fraud-related taxes—are generally not dischargeable. In general, tax debt can be discharged if the tax return was filed more than 3 years prior to filing the bankruptcy
The key is understanding what type of tax debt you owe and how old it is.
What Types of Tax Debt Cannot Be Discharged?
Certain tax obligations almost always survive bankruptcy, including:
- Payroll taxes and trust fund taxes
- Sales taxes collected from customers
- Tax debts from fraudulent returns
- Penalties related to fraud
- Recently incurred tax debt
These debts may still need to be paid, even after a bankruptcy case is completed.
How Chapter 13 Bankruptcy Handles Tax Debt
If tax debt does not qualify for discharge, Chapter 13 bankruptcy may still offer relief. Chapter 13 allows you to:
- Stop IRS collection efforts immediately
- Repay tax debt over 3 to 5 years
- Eliminate penalties and interest on some older tax debt
- Avoid wage garnishments and bank levies
Priority tax debts must be paid in full through the Chapter 13 plan, but the structure often makes repayment far more manageable.
What Happens to Tax Liens in Bankruptcy?
Even if a tax debt is discharged, tax liens may survive the bankruptcy. A lien gives the IRS or state authority a claim against your property.
In some cases, liens can be avoided or reduced depending on the value of your assets and the type of bankruptcy filed. This is a complex area of bankruptcy law and usually requires professional guidance.
Does Bankruptcy Stop the IRS from Collecting?
Yes. Once a bankruptcy case is filed, the automatic stay immediately stops:
- Wage garnishments
- Bank account levies
- IRS collection calls and letters
- Seizure of property
This protection remains in place while the bankruptcy case is active.
Is Bankruptcy the Right Solution for Tax Debt?
Bankruptcy is not a one-size-fits-all solution. Whether it helps depends on:
- The type of taxes owed
- How old the tax debt is
- Whether returns were properly filed
- Your overall financial situation
A bankruptcy attorney can review your tax history and determine whether bankruptcy could eliminate or reduce your tax burden—or whether another option, such as an IRS payment plan or offer in compromise, might be more appropriate.
If you’re facing a lawsuit, judgment, or wage garnishment, Castle Law Office can help. We’ve guided thousands of families through bankruptcy, lawsuits, and garnishments — and we can help you get the fresh start you deserve.
📞 Call us at (816) 842-6200 or
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