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What happens to tax debt in bankruptcy?

Did you know the deadline for filing your tax returns is just over a month away? Tax season can be a stressful time of year for people who are struggling financially, particularly if they owe a large amount of money for their taxes but cannot afford it.

If you are among the many Americans who are or will be dealing with tax debt, you need to assess your financial options. These problems won't go away on their own, so you will want to take action to resolve your debt. For many people, this involves filing for bankruptcy protection. However, if you are thinking about filing for bankruptcy, you should understand a few important things about tax debt and bankruptcy.

First, the type of bankruptcy you file will affect whether your tax debt is dischargeable or not. In Chapter 13 bankruptcy, for instance, tax debt will typically be prioritized for repayment instead of being discharged. In Chapter 7 bankruptcy, federal tax debt could be discharged more easily.

Secondly, you must understand that even if you file for Chapter 7, your tax debt may still remain, as it is only dischargeable under specific circumstances. However, if it is discharged, any penalties you may owe will also be discharged.

Finally, remember that even if bankruptcy won't discharge your tax debt, it can still make it easier to pay. Bankruptcy can eliminate other debts, like medical and credit card debts, which frees up financial resources that you can then use to pay off your tax debt.

Being in debt to the government can be upsetting; it can also be intimidating when the IRS contacts you to collect the money you owe. Rather than trying to navigate the tax and bankruptcy systems alone or hope the debt just goes away on its own, you can consult an attorney who can help you take control of the situation and figure out how to move forward.

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