Does Bankruptcy Clear IRS Debt or Remove Tax Liens?

Does Bankruptcy Clear IRS Debt or Remove Tax Liens?

Does bankruptcy stop tax debt? Well, according to the IRS’s own website (, you can free yourself from the burden of past-due federal tax debt you can’t pay by declaring bankruptcy.

Bankruptcy under Chapter 7 or Chapter 13 of the U.S. Code is available for individuals who have experienced extreme financial hardship, whether from a loss of job, serious injury, illness or other radical change in their lives. In any event, if your income no longer matches your expenses, and subject to certain other qualifying criteria, bankruptcy may be a solid option to get a fresh start. Like most other debts (credit cards, unsecured loans, etc.), bankruptcy may provide an escape hatch for the challenges you are facing from unpaid taxes.

The Law Offices of Kretzer and Volberding P.C. have reputable bankruptcy attorneys in Houston that can help you with the process.

Does Filing Bankruptcy Eliminate Tax Debt?

Can bankruptcy stop tax debt? The answer is yes – under certain circumstances, filing for bankruptcy has the potential to ultimately result in the “discharge” – or government-forced forgiveness – of both your federal and state tax debt.

Several factors weigh in on whether your tax debt may be discharged by bankruptcy. Remember that there are two kinds of bankruptcy. The first, Chapter 7, is often called “liquidation” bankruptcy and is for those filers who have little to no money to pay their debts. Chapter 13 “reorganization” bankruptcy, on the other hand, is for filers with some financial resources, who can pay portions of their debts over time and under a structured plan. Income taxes may qualify either for discharge under Chapter 7, or partial repayment in an amount the payor can handle under Chapter 13.

Note that unlike income taxes, property taxes are only sometimes dischargeable, and several specific kinds of taxes – namely payroll taxes, employment taxes, trust fund taxes, sales taxes, and the penalties associated with nonpayment of these taxes – are never dischargeable.

To be able to qualify for help discharging tax debt or reducing payments, it is important that you have filed your tax returns through the time of your bankruptcy filing completely and correctly. The bankruptcy court will not tolerate any attempts to falsify or evade paying taxes to the IRS. If the court is alerted to a fraudulent conveyance, it will not permit the bankruptcy to proceed.

There are several other requirements.

  • You must have filed all tax returns for tax periods ending within four years of the bankruptcy filing.
  • You must continue to file your taxes each year by April 15, or seek an extension until October 15 and then file, even during your bankruptcy proceeding.
  • If you are currently paying taxes or in a payment plan with the IRS, you should continue to make payments during bankruptcy.
  • Only tax debt connected to a tax return filed at least two years prior to the bankruptcy filing can be discharged in bankruptcy. Tax debt more recent than two years is considered “new” debt and cannot be discharged.

Chapter 7 Overview and Tax Debt

As we mentioned, federal income taxes qualify for discharge under Chapter 7 Bankruptcy. If the required criteria are met, the tax debt, all associated penalties and interest will most likely be discharged. If some of the criteria are not met, this only means that the tax debt will need to be paid, and other debts entered into the bankruptcy filing may still be discharged.

Chapter 13 Overview and Tax Debt

Federal income taxes also qualify for partial repayment in a Chapter 13 Bankruptcy if the required criteria are met, and Chapter 13 bankruptcy for property taxes may also be an effective option. What happens to liens in Chapter 13 bankruptcy depends on whether the lien existed before, or was placed after, the bankruptcy filing, as discussed further in the tax lien and bankruptcy section below.

In a Chapter 13 filing, the bankruptcy “trustee” will help you restructure your debts and enter into a repayment plan. Tax debt will be listed in the plan as a “nonpriority debt,” meaning the tax debts will be treated like credit cards and the trustee will determine a reasonable amount that you are able to repay over three to five years.

If the necessary criteria are not met in regard to the tax debts – for example, if you are not current on your tax filings with the IRS – the tax debt will remain a “priority debt” under the Chapter 13 plan. This means that while the debt can still be paid through a payment plan, it will have to be paid in full.

Tax Debt Not Covered by Bankruptcy

Can bankruptcy remove tax debt? Often, this is the case. However, not every tax debt can be discharged in bankruptcy. Examples of debts that cannot be discharged include payroll taxes, employment taxes, trust fund taxes, sales tax, and any penalties connected to these non-dischargeable types of taxes.

Can Bankruptcy’s Automatic Stay Stop Tax Collections

From a bankruptcy perspective, the IRS is treated the same as any other debt collector. This means that the “automatic stay” of collection actions which is included as part of the bankruptcy process will prevent most collection activities of the IRS, including collection letters and balance due notices, wage garnishment, bank account levies, property seizure, and offsets of due amounts against any tax refund you are entitled to.

Note that the automatic stay will expire when your bankruptcy discharge is entered, and/or your case is closed or dismissed. Also, if you owe tax debt to the IRS, the agency does also have the power to hold back your refund, even if it can’t take it away, and to intercept your refund if you owe child support.

bankruptcy for tax liens

Can Bankruptcy Stop Tax Liens

Does bankruptcy remove tax liens? The answer is a partial yes. Legal and tax experts agree that bankruptcy cannot completely stop pre-existing tax liens by the IRS.

While the automatic stay will stop new lien petitions, existing liens aren’t removed when you file for bankruptcy. For bankruptcy and IRS liens which existed prior to bankruptcy, the bankruptcy will be of little effect.

Here’s how it works. If you have a federal tax lien placed on any property because of back taxes that you owe, the discharge of that debt during bankruptcy won’t remove the lien. The lien will have to be removed separately if you wish to sell your property with clear title.

Therefore, bankruptcy for liens is not the best option. One recommendation is to get back on your feet financially, through bankruptcy, and then attack the liens with help from your lawyer.

Payment Plans or Offer in Compromise

Rather than enter your tax debt into a bankruptcy filing, the IRS provides alternatives that some find to be more desirable. One of these is setting up a payment plan with the IRS for your unpaid taxes. A payment plan is a private agreement which is a legal and binding contract between you and the IRS in which you agree to pay your back taxes in a certain amount within a certain window of time.

There are immediate, short term (120 days) and long term (longer than 120 days) payment plans available with the IRS, all with different administrative charges attached to them. As may be expected, the sooner you pay in full, the less interest and charges accrue.

Another alternative is an “offer in compromise” with the IRS. This is a negotiated settlement or deal you make with the IRS for less than the full amount of taxes owed. The IRS will consider such factors as your income, assets, ability to pay, and other fixed expenses when determining a settlement figure. Note that you cannot pursue this option if you are engaged in a bankruptcy proceeding.

In the end, the value of agreements with the IRS for repayment plans and offers in compromise, within the bankruptcy context, depends on how much debt you owe overall and what percentage of it is owed for taxes. The more your debts are IRS debts, rather than consumer debts, the better off you will likely do working with the IRS directly to take advantage of one of these alternatives.

The Law Office of Seth Kretzer Can Help You Handle Debt During Bankruptcy

When you are trying to figure out how to issues related to your IRS tax debts, you will need a lawyer with specific experience on bankruptcy in Texas and who has the right knowledge and resources to help you.

Contact us online today to schedule a free consultation and discuss the details surrounding your tax debt and bankruptcy case.

Phone: 713-775-3050
Fax: 713-929-2019
Houston, TX 77002
440 Louisiana, Suite 1440