Our Cathedral City bankruptcy attorney is often asked if there is a way to discharge tax debt through bankruptcy. Contrary to popular belief, you can discharge income taxes in bankruptcy. Yet, it is not easy. Discharging tax debt in bankruptcy is not for the weak-willed.

Discharging tax debt requires a solid plan, time, preparation, and patience to execute. Contact us today for an analysis of the dischargeability of your tax debt.

What Debts Can Be Discharged in Bankruptcy?

Most unsecured debts can be discharged through Chapter 7 bankruptcy. Unsecured debts are debts that are not backed by collateral. For example, unsecured debts may include medical bills, credit card debt, back rent, and personal loans.

​A secured debt, on the other hand, is attached to collateral like your home, car, or another asset. With a secured debt, if you fail to pay, the item securing the debt can be taken and sold to satisfy your debt. Examples of this include home foreclosure or car repossession. While your liability to repay a secured debt can be discharged under Chapter 7 bankruptcy, the attached liens do not disappear.

What Debts Cannot Be Discharged in Bankruptcy?

Not all debt is dischargeable. The following debts are not dischargeable:

  • Child support or spousal support payments

  • Student loans, in most cases

  • Court judgments against you for bodily injury or death caused by a drunk driving accident

  • Certain tax debts

How Can I Discharge Tax Debts in Chapter 7?

You can discharge past due income taxes in a Chapter 7 proceeding only if the following is true:

  • The taxes incurred were based on “income” tax, not payroll or other taxes.

  • You did not commit fraud or tax evasion.

  • The tax debt is at least three years old.

  • You filed a tax return. You cannot be eligible to discharge a tax debt if you never filed a return. You may, however, be able to file a late return.

  • You pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition or must not have been assessed yet. If the IRS has stopped collection efforts due to an “offer in compromise,” this time limit may be extended.

  • The IRS has not yet filed a tax lien on your property.

Can You Discharge Tax Debt when There’s a Business Involved?

It can be complex to close a business with the many tax implications involved. However, if you are thinking of closing a business that is struggling financially, you may owe income taxes. If this is the case, you have a couple of options:

  • You can file for Chapter 7. Chapter 7 will allow you to write off eligible business debts. This can include older business tax debts and current business tax debts which meet certain criteria. Any taxes which are not dischargeable will likely have to be paid in monthly installments.

  • You can file for Chapter 13. Chapter 13 essentially restructures your debt. Our tax debt lawyer would help you develop a three-to-five year repayment plan, which could include the discharge of your older business tax debt. During this time, you would be protected from collection actions from the IRS and other creditors.

Planning for Bankruptcy

If you are contemplating bankruptcy, it is important to know that a good plan can save time, effort and money. You must be aware of the bankruptcy rules and timelines before you file.

Being prepared will ensure you receive the greatest discharge of debts possible. The following strategies are sophisticated and are intended to be implemented by an attorney:

  1. WAIT the appropriate lengths of time prior to filing for bankruptcy.

  2. FILE any past-due tax returns as quickly as possible so the clock will begin running on those.

  3. STAY in compliance with your tax issues as much as possible going forward. This includes paying your current tax debt.

  4. AVOID tax fraud and evasion. Also avoid, whenever possible, “trust fund” taxes, particularly payroll taxes.

  5. BE AWARE of tax liens.

It is crucial that you request a tax transcript from the IRS for the tax years in question. Use IRS Form 4506-T. When you receive the tax transcript, have our experienced bankruptcy attorney review it. There are many “traps” in a tax transcript which can affect whether your tax debt is dischargeable.

Do I Need a Lawyer to File Bankruptcy?

Navigating the nuances, details, and pitfalls of bankruptcy law is not for amateurs or for “do-it-yourselfers.” Without the careful guidance of an experienced bankruptcy lawyer, there may be details about your case that can influence the outcome.​ Discharging tax debt in bankruptcy is not for everyone.

Questions About Tax Debt and Bankruptcy?

If you find yourself dealing with overwhelming debt, accompanied by creditor collection actions, call our office. Our Palm Springs bankruptcy attorney can help you determine the most effective debt relief options. We can assess your unique situation, answer your questions, and build you a solid plan for your bankruptcy filing.

At the Law Offices of Robert L. Firth, we work with clients throughout the Coachella Valley, Imperial County, and the Inland Empire. If you have any doubt about the next step to solve your problems, call us to schedule a free consultation. We can explore your options to accomplish your goals.