Eliminate Taxes in Chapter 7
Chapter 7 tax forgiveness
Certain taxes can be eliminated entirely in a Chapter 7 bankruptcy. The timing of your case filing is critical to successful discharge of taxes.
Determining dischargeability of taxes is a complicated matter. In general, income taxes more than three years old are dischargeable if the tax return was filed at least three years ago and three years has elapsed since April 15th of the year the tax return was due. Taxes for wage withholding, sales taxes, and other taxes other than income taxes are not dischargeable. Taxes assessed in the last 240 days are not dischargeable.
Even if the taxes are not dischargeable in Chapter 7 bankruptcy, you can still fix the problem through a Chapter 13 bankruptcy (details below).
Non-dischargeable taxes are called a “priority” debt. While you are in Chapter 7 bankruptcy, the IRS can take no action against you. However, once you receive your Chapter 7 discharge, the IRS can begin collection efforts again. This is why your tax situation needs to be analyzed very carefully before filing bankruptcy.
Chapter 13 tax reorganization
The great thing about a Chapter 13 bankruptcy when you owe taxes is that you get to pay the IRS in installments — without penalty and interest. Even if your taxes are not subject to discharge in a Chapter 7 bankruptcy, a Chapter 13 bankruptcy can make them manageable. Chapter 13 will prevent IRS levies against your wages and assets.
Under Chapter 13, the amount you owe the IRS is paid in full over a three to five year bankruptcy reorganization period. The high interest rates and penalties stop when your bankruptcy is filed. The IRS and/or the Colorado Department of Revenue gets paid up front so that your other creditors receive what is leftover — if anything — after the taxes are paid. Often, this means that as much as 98 percent of your other unsecured debt is discharged (written off) in Chapter 13.