Taxes and Bankruptcy

Are Taxes Dischargeable in Bankruptcy?

The answer is: yes and no.  This is a very complicated area where the Bankrutpcy Code and the Tax Code collide.  At the risk of oversimplifying, here are some general guidelines:

Income taxes.   Income taxes that are more than three years old may be dischargeable, so long as you filed your tax returns for those years.  However, if you have been in an installment repayment plan with the IRS or DOR, or you had a prior bankruptcy case, the time limit is extended.  And, there are other exceptions.  Its best to talk with an experienced bankruptcy attorney to find out for sure.

Excise Taxes.  Excise taxes based on property values in Massachusetts, such as you auto, are generally dischargeable.  However, this is unique to Massachusetts.  Excise taxes in other states are generally not.

Real Estate Taxes.  Your personal liability on real estate taxes is dischargeable, however, the City or Town can retain a lien on the property.  So if you want to keep the property, you’ll eventually have to pay back the taxes in order to clear the lien, even though your personal liability to pay is discharged.  But if you don’t want to keep the property, the burden to pay the tax often passes to the new owners.

“Trust Fund” Taxes.  Taxes that you have collected or withheld from customers or employees, such as payroll taxes or sales taxes, are never dischargeable.

Bankruptcy can help even if the taxes are not dischargeable.

Many people share the common misconception that bankruptcy can’t help them with tax debt.  Even when you can’t discharge a tax debt, a Chapter 13 plan will allow you to repay your back taxes in an affordable plan over 36-60 months (and up to six years in a Chapter 11 case).  Often this is a better plan than an IRS installment plan, and you are protected from nasty tax collection practices, like tax liens and bank account levies, the whole time.  But most importantly, two provisions of the Bankruptcy Code help you repay tax debt faster and more efficiently than you could otherwise:

  • No interest accrues on tax debt while you are paying through the Chapter 13 plan; and
  • Tax debts generally get top priority and are repaid ahead of all other creditors.

Call today or use the hand form below to talk to an experienced bankruptcy attorney today to learn if your tax debt can be resolved in bankruptcy.  We offer a free initial half-hour consultation.