People considering filing bankruptcy in Texas should be aware that only certain types of bankruptcy allow for tax debt relief. In addition, only certain kinds of federal tax debt are eligible for relief. Understanding how various types of bankruptcy work is important to understanding what tax options may be available. Chapter 7 bankruptcy may be a viable option, but Chapter 13 may be one’s only recourse.
Chapter 7 bankruptcy is intended to discharge debts entirely. In this type of bankruptcy, once all salable assets have been liquidated, the debts are considered to be discharged. IRS tax debt may be discharged as well, but there are limiting conditions. First, the debt must have been incurred through personal income tax, not payroll taxes or filings with intent to defraud or evade taxes. Second, the debtor must have filed viable tax documents for the years in question at least two years prior to the bankruptcy proceedings. Finally, at the time of bankruptcy filing, the tax liability must be no younger than three years old.
Under Chapter 13 bankruptcy, tax debt rolls into a repayment plan like other debts. Some debtors may find it more beneficial to contact the IRS and negotiate an offer in compromise. Federal property liens remain after bankruptcy discharge in any case and must be paid prior to selling property.
When advising a client on the potential benefits of bankruptcy for a given case, an attorney may start by looking at the nature and amount of the debt involved as well as how the debt was incurred. The attorney might advocate for the client by negotiating with creditors including the IRS to either reduce or eliminate the existing debts. If necessary, the attorney may take the case to trial.