Eliminating Tax Debt Through Bankruptcy

We’re in the midst of tax season — a time period that can cause an overwhelming amount of stress for many families. If you are struggling with income tax debt, now may be the time to start looking into bankruptcy to remedy your financial situation.

Filing for bankruptcy on IRS debt is a complicated process, but it can give you the relief and fresh start you may have been longing for for a while. To help guide you in your decision, here’s what you need to know about eliminating tax debt through bankruptcy.

Bankruptcy & Tax Debt FAQs

Does bankruptcy clear tax debt?

You may be able to have some types of tax debts eliminated when you choose to file for bankruptcy. When it comes to taxes, there are many conditions that make you ineligible or eligible, and certain things like payroll taxes and penalties for fraud cannot be erased. It’s important to speak to an experienced bankruptcy attorney who will look into your unique situation to give you the most accurate course of action.

What is the “3-2-240” Rule?

Whether your tax debt can be completely eliminated through Chapter 7 bankruptcy comes down to time. Commonly referred to as the “3-2-240” rule, you must meet each of the three conditions below to be able to free yourself of your income tax debt:

• 3-Year Rule: The taxes must have been due at least three years before the filing of the bankruptcy case.
• 2-Year Rule: The tax return that generated the income tax debt must have been filed at least two years prior to the filing of your bankruptcy petition.
• 240-Day Rule: Taxes must have been assessed at least 240 days before you file for bankruptcy or not assessed at all.

What if I do not qualify for Chapter 7 bankruptcy?

If you do not qualify for Chapter 7 bankruptcy, or do not meet all of the conditions for IRS bankruptcy under Chapter 7, Chapter 13 bankruptcy is another smart option. Under this type of bankruptcy, your income tax debt will not be eliminated, but will be restructured into a 3- or- 5-year plan where you will make more manageable payments to the IRS. At the end of the payment plan, you should be caught up with your finances.

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