Filing for Chapter 7 or a Chapter 13 and getting approved may discharge you from some kinds of personal income tax liabilities. However, if you meet certain requirements, you may even get discharged from all sorts of tax liabilities through filing bankruptcy.
Filing Under Chapter 7 And Taxes
If you filed your petition under chapter 7 and got subsequent discharge, some of the taxes will automatically be eliminated if the following criteria are fulfilled.
The Non-Dischargeable Taxes
Sometimes, even if you meet all the above criteria, you may not get your tax liabilities discharged under chapter 7. For example, if the IRS has placed a tax lien on some of your assets, you are liable to pay such tax liabilities off in full. However, if you have been declared as bankrupt under chapter 13, the court may order the IRS to eliminate the penalties or agree to be paid as per the suggested payment plan.
Filing Under Chapter 13 And Taxes
Chapter 13 bankruptcy requires you to follow a repayment plan. You just have to focus on your finances and make subsequent payments to the trustee who in turn pays the creditors back on your behalf. Obviously, the creditors are not paid in full all at once. They get their money back in particular installments as has been suggested by the court. Similarly, the court can also ask the IRS to accept extended tax payments. However, you have to pay off the full amount of taxes over a period of 3 to 5 years. The tax penalties are usually discharged under chapter 13 because these penalties are considered as the amount owed to unsecured creditors.
Overall, whether you file under chapter 7 or chapter 13, filing bankruptcy can be very useful in eliminating the taxes.