Can Chapter 7 discharge my tax debt?

 Posted on January 06, 2021 in Chapter 7 Bankruptcy

If you contemplate filing bankruptcy and owe back taxes to the IRS, you may have heard that Chapter 7 will not discharge tax debt. While generally true, Upsolve.org reports that Chapter 7 can discharge some income tax debts under some circumstances.

To make your IRS debt dischargeable under Chapter 7, it must meet the following criteria:

• It must be three or more years old.
• You must have filed a tax return for it at least two years prior to filing bankruptcy.
• The IRS must have determined the debt amount at least 240 days before you file bankruptcy.

Bankruptcy alternatives

You have two alternatives to bankruptcy when dealing with your federal income tax debt: an IRS payment plan and an Offer in Compromise. Both require you to work directly with the IRS, and neither discharges your debt, only gives you extra time to pay it.

Payment plan

You can apply online for a payment plan. Depending on the amount you owe and the time you believe you need to pay it, you may or may not need to pay a set-up fee. Generally, the IRS does not charge for payment plans of 120 days or less. Longer payment plans have a graduated set-up fee, starting at about $30.

Offer in Compromise

For this option, you negotiate with the IRS to settle your tax debt for a reduced amount. Keep in mind that the IRS will look at several things, including the following:

• Your annual income
• Your annual expenses
• The assets you own
• Your ability to pay

If you have extensive consumer debt, but your tax debt fails to qualify for Chapter 7 discharge, bankruptcy may still represent your best option. Why? Because Chapter 7 discharges virtually all your consumer debt, including your credit card debt. Once relieved of those obligations, you likely can more easily obtain a payment plan or compromise offer from the IRS.