Bankruptcy and Tax Liability


Income Tax in Bankruptcy

Tax debt, including income tax debt, is a very unique type of debt. It is considered a priority debt and cannot typically be discharged in bankruptcy. However, while it cannot be discharged in Chapter 7 bankruptcy, it can be included in a Chapter 13 bankruptcy repayment plan. Furthermore, filing Chapter 13 stops interest from accumulating on the tax debt.

The law firm of Hickson Law, PC, in Austin, Texas, features a Consumer Bankruptcy Attorney Certified in Consumer Bankruptcy by the Texas Board of Legal Specialization with decades of experience and a thorough understanding of the bankruptcy law. She is able to help people overcome even the most challenging debts, including tax debt.

How Old Is Your Tax Debt?

While recent income tax debt and other tax debt cannot be discharged, tax debt that is more than three years from the due date may be considered a non-priority debt. Non-priority debts are dischargeable. This means that, depending on how old your tax debt is, you may be able to eliminate a portion of it through bankruptcy. She will carefully review your case to determine what bankruptcy can do for you.

Taxes are non-priority debts only if they are for a tax year ending more than three years prior to filing for bankruptcy and further, provided they were filed timely, or if not timely, they would have to be filed more than two years before the case is filed.

Other Tax Considerations

You may be aware that if a debt is forgiven after negotiating with a creditor, there may be tax consequences. That forgiven debt may be treated as income and taxed accordingly. However, if the debt is discharged in bankruptcy prior to the debt forgiveness, there will be no tax consequences.
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