Will Chapter 7 Eliminate Tax Debt?

Will Chapter 7 Eliminate Tax Debt?

While a Chapter 13 bankruptcy case is considered a “reorganization,” a Chapter 7 bankruptcy is considered a “liquidation.” Consequently, the discharge of debts received in a Chapter 13 case is different than the discharge of debts received in a Chapter 7 case. Chapter 7 debtors may discharge tax debts with certain restrictions.

A bankruptcy discharge eliminates debts by removing the legal obligation to repay them.

Most consumer debts such as credit cards and medical bills are eligible for discharge in a Chapter 7 case. In contrast, debts such as domestic support obligations and student loans are non-dischargeable, which means that bankruptcy debtors remain legally obligated to repay them.

Tax debt such as income tax debt, if it meets specific requirements, may be dischargeable. However, most other taxes, such as property taxes, are non-dischargeable, and will not be eliminated in a Chapter 7 bankruptcy case.

The criteria for discharging income tax debt in a Chapter 7 bankruptcy are strict. They are as follows:

  • The income tax debt must be at least three years old.
  • The taxpayer must have filed an income tax return for the tax year in which taxes are attempting to be discharged. Tax debt is never dischargeable if the IRS or the Utah Department of Revenue files the tax return on behalf of a taxpayer.
  • Taxpayers may not have committed tax fraud or tax evasion.
  • 240 days must have passed between assessment of the tax debt and the bankruptcy case filing. To obtain information as to when the tax debt was assessed, you must obtain transcripts from the IRS. To obtain Utah transcripts, there is a $6.50 fee.

There may be other requirements for successfully eliminating income tax debt. Consult with a qualified bankruptcy attorney who may assess your situation and inform you whether your income taxes are dischargeable in bankruptcy, specifically, a Chapter 7 case.

Utah income tax is also dischargeable under the same rules. Usually, the most important two rules are that the taxes are old enough to be discharged and that the IRS or Utah State Tax Commission did not file the tax return on your behalf.

Remember that if you owe any delinquent income taxes, the IRS or the Utah State Tax Commission may place a lien on any property that you own to secure the tax debt. If the tax lien was in place before the bankruptcy filing, and the taxes are discharged, the lien remains attached to the property. While income tax debt must be at least three years old to be dischargeable in bankruptcy, procrastinating on a solution may result in the IRS placing a tax lien on an asset. A Morrison Law Group attorney may help you assess whether your taxes are dischargeable in a Chapter 7 case.

Theron Morrison and the attorneys at the Morrison Law Group have helped 8,000 people file bankruptcy and gain a fresh start. We have helped over 20,000 Utah residents deal with all types of financial difficulties caused by all types of events. Talk to the Morrison Law Group about your Chapter 7 or Chapter 13 bankruptcy options. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.


Theron Morrison

Theron Morrison

Utah’s top bankruptcy and consumer protection attorney.