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 taxpayer's 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 may be discharged if they are old enough. In the case, they are dischargeable in Chapter 7 if all of the following criteria are met.