The American Bankruptcy Institute reported that in 2022, of the 13,076 bankruptcy cases filed in Indiana, 7,833 were for Chapter 7.
Navigating the complexities of bankruptcy can be a daunting task, especially when it comes to tax debt. Individuals seeking financial relief often turn to Chapter 7 as a potential solution. However, the question on many minds is whether it can truly eliminate this type of debt.
Chapter 7 and tax debt
Chapter 7, often referred to as liquidation bankruptcy, involves the sale of non-exempt assets to pay off creditors. When it comes to tax debt, not all types are dischargeable. Fortunately, income taxes are generally eligible for discharge if they meet specific criteria. For example, the taxpayer must have incurred the tax debt at least three years before filing for bankruptcy, filed the tax return a minimum of two years before initiating the process, and the IRS assessment must be at least 240 days old or not yet assessed.
When an individual files for bankruptcy, the treatment of the tax debt depends on the nature of the tax owed. While income tax may be eligible for discharge under specific conditions, other types of taxes are generally non-dischargeable. Additionally, any tax debt incurred through willful evasion or fraudulent activities is not dischargeable under Chapter 7. This helps to prevent intentional misuse of the bankruptcy process.
Bankruptcies provide some people with an avenue for tax relief. However, it is important for individuals to carefully assess their tax situation before filing for Chapter 7 protection.