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Can Chapter 7 bankruptcy help someone with major tax debts?

On Behalf of | Jun 4, 2024 | Bankruptcy

Some debts result from unbalanced budgets and similar challenges. Credit card balances, for example, often start small and accrue slowly over time. Other debts may arise with little warning. Someone involved in a car crash caused by an uninsured driver could go from having no debt to tens of thousands of dollars in financial obligations that they worry about covering almost overnight.

Someone who has always been diligent about their finances could also end up struggling with debt if they have underpaid their taxes previously. Tax rules are complex and constantly change, making it easy for taxpayers to unintentionally pay less than they should. The Internal Revenue Service (IRS) is quite notorious for aggressively pursuing debt collection against those who underpay their income tax obligations.

Someone who is facing a large tax debt and is unsure of how to manage the issue might think about filing for personal bankruptcy. Is bankruptcy a viable solution for handling income tax debt?

Tax debts are difficult to discharge

People often think of bankruptcy as a means of eliminating their debt. A Chapter 7 bankruptcy, when successful, can halt collection activity and discharge some of an individual’s financial obligations. The majority of tax debts are not eligible for discharge in bankruptcy proceedings. Property tax does and recent income tax debts are not typically subject to discharge in an individual Chapter 7 filing. The only tax debts that people can potentially discharge are income tax obligations that are three years old or older.

Although people cannot immediately eliminate their tax-related financial obligations, bankruptcy could still help them if their income tax debts put pressure on the household budget. The discharge of other debts can make it easier for someone to negotiate a payment arrangement with the IRS. If someone has multiple years of outstanding tax debts, a successful Chapter 7 bankruptcy could help them reduce the total amount they need to pay.

Although a personal Chapter 7 bankruptcy does not necessarily eliminate income tax debts, the process can be beneficial for those struggling with overwhelming financial obligations. Discussing a Chapter 7 bankruptcy as part of a broader plan to resolve personal debt could help an individual regain control over their finances generally and moving forward.