Tax Relief in Bankruptcy

Bankruptcy can provide relief from the tax man.  Some taxes and penalties are dischargeable;  those that can't be discharged can be paid without interest in Chapter 13.

The automatic stay in bankruptcy stops even collection actions by taxing authorities, including garnishment and seizure.  These provisions of the law apply equally to state and federal tax agencies.

How much relief?

The precise measure of the relief available in bankruptcy depends on a number of factors including

            1)      the kind of tax involved , 

            2)      the age of the tax,    

            3)      whether a return was filed, and

            4)      the chapter of bankruptcy selected.

In general,  unsecured income taxes that were first due more than three years before the bankruptcy is filed, for which a timely and non fraudulent return was filed, can be discharged in full in any chapter of bankruptcy.

Specific taxes

Offers in compromise

An offer in compromise may be a better solution when the priority tax (recent taxes or trust fund taxes) is too large to pay off in a Chapter 13.  The IRS is now also under direction to consider offers in compromise from those with pending bankruptcy cases.

Read a tax professional's assessment of offers in compromise which  historically could be made only outside of bankruptcy.  

In summary:

    This is only a summary of the treatment of taxes in bankruptcy. The effect of recent tax assessments, offers in compromise, and amended returns have been omitted for simplicity.  Be certain to bring these issues to the attention of any bankruptcy lawyer you  consult.