First Time Penalty Abatement

Discharging Tax Debts in a Bankruptcy

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is spelled out in (you guessed it!) Chapter 7 of the United States federal Bankruptcy Code and is also sometimes referred to as “straight” or “liquidation” bankruptcy. In this form of bankruptcy, you might be eligible to cancel some or all of your debts (some tax penalties are also eligible for discharge) or sell your property or assets to repay creditors. However, the bankruptcy court essentially assumes control of your property as well as your debts when you file Chapter 7. In rare exceptions, individuals who file Chapter 7 might still be able to manage their own property and income after they file for bankruptcy.

If you are considering filing Chapter 7 bankruptcy (or Chapter 13 bankruptcy) to resolve any tax debts exceeding $10,000, please continue reading and contact our offices today by calling (410) 872-8376.

Eligibility Requirements to File Chapter 7 Bankruptcy

There are certain eligibility restrictions and requirements individuals must meet in order to file for Chapter 7 bankruptcy. For instance, if you have received a bankruptcy discharge within the last 6-8 years, you are likely ineligible to file Chapter 7. You also won’t be eligible to file Chapter 7 if you have had a Chapter 7 or 13 case dismissed within the previous 180 days due to violating a court order, or if a court has determined that you fraudulently filed for bankruptcy in the past.

Additionally, if your monthly income exceeds the median income for a household of your size within your state, you are not eligible unless you complete the “Means Test,” which measures your disposable income and determines the amount of your debt that the government believes you could reasonably repay over a five-year repayment period.

Lastly, your bankruptcy claim could be dismissed if the court believes that you have attempted to deceive or cheat your creditors, or that you have concealed your assets to protect your property. Actions and behaviors that will raise the suspicion of the court may include:

  • Transferring assets to friends and family
  • Maximizing debts when it was clear that you were incapable of repayment
  • Hiding assets or money during a divorce
  • Lying or failing to disclose accurate information concerning debts and income on a credit application

RELATED: Handling a Notice from the IRS the Right Way

All bankruptcy documents must be signed “under penalty of perjury,” which means that individuals who purposefully deceive the courts will have their case dismissed and could potentially be prosecuted.

Discharging a Tax Debt by Filing Chapter 7 Bankruptcy 

If all of the following conditions are applicable, you might be able to successfully file Chapter 7 bankruptcy and eliminate federal income tax debts:

  • The debts are solely related to income taxes: Any tax debts other than those that arise from income tax cannot be eliminated by filing for Chapter 7 bankruptcy.
  • You did not fraudulently file or willfully evade paying your taxes: A fraudulent tax return or an attempt to evade your tax obligation will preclude you from discharging your tax liabilities through Chapter 7 bankruptcy.
  • The tax debt must date back at least three years: The tax return(s) in question must have been due at least three years before you filed for Chapter 7 bankruptcy.
  • You have filed a federal tax return: With a few rare exceptions, you must have filed a federal tax return for your current tax liability at least three years before filing for bankruptcy.
  • Your claim satisfies the “240-day Rule”: The IRS must have assessed your income tax liability at least 240 days before you file for Chapter 7 bankruptcy. However, this time limit may vary if collection actions were suspended due to an offer in compromise.

Federal Tax Liens and Bankruptcy

Unfortunately, while successfully filing for Chapter 7 could qualify you to discharge your tax debts, no form of bankruptcy can eliminate previous tax liens. Chapter 7 does eliminate your repayment obligations and also prevents the IRS from garnishing your wages or financial accounts, but you must fully repay any liens placed on your property before filing for bankruptcy in order to sell said property.

Contact S.H. Block Tax Services to Learn More!

If you are considering filing for Chapter 7 bankruptcy to discharge previous tax debts, please contact S.H. Block Tax Services today by completing the brief form on this page or by calling us directly at (410) 872-8376.

If you are unable to discharge your debts via Chapter 7, we might be able to help you execute alternative arrangements, such as an offer in compromise ― a convenient and affordable repayment method offered by the IRS that allows taxpayers to repay less than their original tax liability. Additionally, the offer in compromise is far better for your credit score than filing bankruptcy.

Our attorneys and staff have over 100 years of combined experience representing taxpayers, and we are looking forward to speaking with you to resolve your tax problems for good! However, the IRS and state of Maryland abide by strict deadlines, so please contact us as soon as possible to avoid any further penalties or complications regarding your tax obligation.

The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.

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