Tax bankruptcy

Many individuals, including accountants and lawyers, are under the misconception that taxes are not dischargeable in bankruptcy. Nothing could be further from the truth. Although there are a number of technical rules that can trap the unwary, most tax liabilities are dischargeable.

There are two basic types of tax bankruptcy available to average taxpayer: liquidation under Chapter 7 and wage earner plans under Chapter 13. In Chapter 7 all of taxpayers assets and liabilities are marshaled. All assets, except certain exempt assets are liquidated and paid to creditors in the order specified by the bankruptcy code. To the extent non-exempt assets are insufficient to pay all creditors, most of the unpaid debts are forgiven; i.e., they are discharged

Generally, all income taxes, both Federal and State taxes may be discharged if they are old enough. In the case of the income taxes, they are dischargeable in Chapter 7 if all of the following criteria are met.

1. The tax is for a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition;
2. A tax return was filed more than two years prior to the filing of the bankruptcy petition;
3. The tax was assessed more than 240 days prior to filing of the bankruptcy petition;
4. The tax was not due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat the tax;
5. The tax was not assessable at the time of the filing of the bankruptcy petition; and
6. The tax was unsecured

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