If you owe back taxes and have considered bankruptcy, you may wonder if you are able to eliminate these debts. Depending on your circumstances, certain federal income tax debts may be discharged through Chapter 7 or managed through Chapter 13. However, this ultimately depends on factors like the age of the tax debt, whether the tax return was filed, and the type of taxes owed. If these actions are heading your way, please continue reading to learn whether a bankruptcy filing can potentially discharge your outstanding tax debt and how an experienced Louisville, Kentucky consumer bankruptcy lawyer from Schwartz Bankruptcy Law Center can protect you from IRS intervention.

Can a Bankruptcy Filing Discharge My Tax Debt?

If you are in over your head with consumer debt, including tax debt, it may be well worth considering filing for Chapter 7 or Chapter 13 bankruptcy. This is because, at the close of a successful consumer bankruptcy case, the Kentucky bankruptcy court may order a discharge of eligible debts. Notably, dischargeable debts no longer fall within a debtor’s immediate financial responsibility from that point forward, meaning their creditors are no longer capable of pursuing collection efforts for these debts.

While many people assume tax debt cannot be eliminated during bankruptcy, this is not always true. Certain federal income tax obligations may be eligible for discharge if specific requirements established under bankruptcy law are fulfilled.

When Can Tax Debt Be Discharged in Kentucky?

  • The debt typically must involve federal or state income taxes
  • The tax return generally must have been due at least three years prior to filing for bankruptcy
  • The return must have been filed at least two years before filing
  • The tax assessment must have occurred at least 240 days before filing for bankruptcy
  • The tax debt cannot result from fraud or willful tax evasion

Understanding the Three Key Tax Debt Rules

Certain timing requirements can play a considerable role in determining if a tax debt is eligible for discharge through bankruptcy.

The Three-Year Rule

  • The tax return generally must have been due at least three years before the filing date of the bankruptcy case
  • Extensions may be applicable, impacting the date calculator
  • This rule is applied to many income tax obligations

The Two-Year Rule

  • The tax return generally must have been filed at least two years prior to the filing date
  • Returns filed late can impact eligibility for discharge
  • Filing requirements should be carefully reviewed

The 240-Day Rule

  • Generally, the IRS must have assessed the tax debt at least 240 days prior to filing for bankruptcy
  • Certain IRS actions may pause or extend the period
  • Timing calculations can considerably impact discharge eligibility

While these timing rules are commonly utilized to determine if income tax debt may qualify for discharge, additional exceptions may be applicable. The dischargeability of tax debt ultimately depends on the specific circumstances of each case, including filing history, assessment dates, and any other prior collection efforts or bankruptcy proceedings.

Which Tax Debts Are Generally Non-Dischargeable in Kentucky?

In Kentucky and throughout the country, some tax obligations may survive bankruptcy, ultimately remaining collectible after the case concludes.

Tax Debts Commonly Excluded from Discharge

  • Tax liens
  • Recent property taxes
  • Taxes that arise from fraudulent returns
  • Trust funds
  • Social Security taxes
  • Post petition tax liabilities

Can a Bankruptcy Filing Stop IRS Collection Efforts?

A bankruptcy filing generally results in an automatic stay, which is a protection granted to bankruptcy filers that immediately stops all collection efforts. As such, creditors, including the IRS, cannot continue calling, proceed with lawsuits, foreclose property, or take any other action unless the court specifically allows them to do so.

What Does the Automatic Stay Stop?

  • Wage garnishments
  • Tax levies
  • Most creditor collection activities
  • Collection lawsuits
  • Collection phone calls
  • Certain bank account seizures

What Happens to Tax Debts During Chapter 13?

Even if tax debts are ineligible for discharge during Chapter 7 bankruptcy, Chapter 13 may provide an alternative solution. A repayment plan can allow certain outstanding tax obligations to be paid over time, while providing protection from collection efforts.

Potential Benefits of Chapter 13 for Tax Debts

  • Structured repayment of debt over three to five years
  • Protection from collection efforts under the automatic stay
  • Opportunity to repay priority debts, including tax debts
  • Potential relief from unsecured debts
  • Increased financial flexibility after the completion of the plan

Kentucky Tax Debt and Bankruptcy Considerations

Bankruptcy cases filed in Louisville and throughout Kentucky are governed by federal bankruptcy law and proceed through the United States Bankruptcy Court for the Western District of Kentucky.  However, individual financial circumstances can considerably impact the outcome of tax obligations during bankruptcy.

Factors That Can Impact Your Eligibility

  • Type of tax debt owed
  • Existing tax liens
  • Filing history
  • Assessment dates
  • Chapter 7 vs. Chapter 13 eligibility
  • Household income

Contact an Experienced Kentucky Bankruptcy Attorney Today

In conclusion, if you still have lingering questions at this point in time, please do not hesitate to reach out to a skilled Louisville, Kentucky consumer bankruptcy lawyer. The team at Schwartz Bankruptcy Law Center will certainly be the perfect fit for you. Contact us today to learn how we can assist you.