Taxes in Bankruptcy

• Federal income taxes are dischargeable in bankruptcy, provided that your tax debts meets certain qualifications. This means that the debt can be entirely discharged in a Chapter 7 bankruptcy or given priority repayment as a secured claim in a Chapter 13 repayment plan.
  
  

Qualifying Taxes

• To qualify for discharge in a bankruptcy, your tax debts must be at least three years old at the time you file your bankruptcy petition. The debt must be backed up by a tax return filed two or more years prior to your filing, and the debt can't be the result of an attempt to evade taxes.
  
  

Tax Liens

• If the IRS already has a tax lien on your property, the lien survives a bankruptcy discharge. This means that while you technically won't owe your debt, you'll still have to repay it if you want to get rid of the lien. If you don't, and you sell your home (or whatever property the lien is attached to), the amount of the lien will come out of the proceeds.
  
  

Alternatives

• If your only significant debt is tax debt, talk to a tax attorney about an offer in compromise. By showing the IRS that you can't afford to pay your tax bill in full, you may be able to negotiate a significant reduction in your debt without having to resort to bankruptcy. One significant advantage to an offer in compromise is that you won't have to deal with the long-term ramifications of bankruptcy on your credit report. Plus, since there are limitations on how often you can receive a bankruptcy discharge, you can preserve your ability to file for bankruptcy in a few years if your financial situation deteriorates.