Most people think taxes can never be erased in bankruptcy — but that’s not true. In most cases, income tax debts can be reduced or even wiped out, giving you real financial relief. Learn the rules that could change your future.
When people hear the word “bankruptcy,” many immediately assume that it can never help with taxes. It’s one of the most common myths I hear: “Sure, bankruptcy can clear credit cards or medical bills, but the IRS will chase me forever.” The truth is more hopeful than that. In many situations, bankruptcy can erase or reduce income tax debt, giving people a chance to breathe again.
Why the Myth Exists
It’s easy to see why this misconception has stuck around. Taxes feel different from other debts. They involve the government, complicated rules, and non-judicial collection powers like wage garnishments, bank levies and tax liens Because of this, many people believe tax debt is untouchable. While not all tax debts qualify for discharge, the law does allow relief for income tax debt once certain conditions are met.
Which Tax Debts May Be Wiped Out
Bankruptcy can never eliminate every kind of tax obligation. For example, payroll taxes, certain compensatory type penalties, and tax claims attributable to fraud usually cannot be eliminated in bankruptcy. But if your debt is from income taxes (federal or state), there is a strong chance bankruptcy could help. The key lies in meeting a few important rules about timing and compliance.
The Basic Rules for Tax Discharge
There are three main requirements for income tax debts to be eligible for discharge in bankruptcy:
- The debt must be old enough. Generally, the tax return must have been due at least three years ago. The three-year period is calculated with reference to the due date of the return, which could change if you applied for an extension.
- You must have filed your tax return. If you didn’t file a return, or if you filed late, the tax debt may not qualify for discharge.
- The IRS must have assessed the tax claim (and there can be more than one in any particular taxable period) debt more than 240 days ago. “Assessment” usually means the IRS has legally recorded the amount owed.
Importantly, there are quite a few “tolling” events that could suspend the running of these “tax dischargeability” periods, so a proper Tax Dischargeability Analysis should be performed.
There’s one more big condition: no fraud or willful tax evasion. Bankruptcy laws are designed to protect honest taxpayers who fell behind, not those who tried to cheat the system.
An Example of How This Works
Let’s say you filed your 2017 tax return on time in April 2018. If you still owe money for that tax year, and the outstanding amount due only relates to the balance due per the tax return, after April 16th of 2021, this tax claim should qualify for discharge in bankruptcy — assuming that the tax return was not prepared fraudulently. On the other hand, if you didn’t file until last year, you must tack-on two years from the date the return was received by the taxing agency, These details matter, and they can make the difference between full relief and continued IRS collections.
What Bankruptcy Can’t Do
Even when your tax debt qualifies for discharge, bankruptcy may not resolve everything. For instance, if the IRS filed a tax lien against your home before you filed bankruptcy, the lien may remain attached to your property even if your personal tax obligation is erased. In other words, bankruptcy can wipe away the debt itself, but not always the lien. However, a tax-bankruptcy attorney should be able to obtain a release of the tax lien subsequent to the bankruptcy case filing.
Why Professional Guidance Matters
The rules for tax discharge in bankruptcy are complicated, and even small details can change the outcome. That’s why it’s important not to make assumptions about what’s possible. A professional review of your tax years, filing history, and IRS records can ensure a great result, while failing to do so can create a catastrophic outcome. Moving Forward
If your tax debt is recent or small, free credit counseling may be the better option to help you set up a repayment plan and avoid bankruptcy altogether. But if your tax debt is older, overwhelming, and feels impossible to manage, bankruptcy could give you the fresh start you need.
Final Thoughts
The idea that “taxes can never be erased in bankruptcy” is simply not true. While the process is technical and the rules must be followed carefully, many people each year find real relief from tax debt through bankruptcy. If you’re struggling, know that you do have options — and the sooner you explore them, the sooner you can move toward peace of mind.
Next Step:
- For manageable debts: [ Get Free Debt Counseling Help ]
- For overwhelming tax debt: [ Learn About Bankruptcy Options ]