Bankruptcy can solve a lot of tax problems, but typically it is not as effective as an agreed upon and paid offer. Liens and certain taxes often remain after bankruptcy and are not discharged. Nevertheless, there are many circumstances where bankruptcy is appropriate and should be considered. For example, if the taxpayer has non-tax debts, owns minimal assets and perhaps equity in a home (without a tax lien), and owes personal income taxes, then a Chapter 7 bankruptcy may be the solution.

A discharge of personal income taxes in a Chapter 7 bankruptcy is possible if: (1) the tax year in question is over three years old, including extensions; (2) the tax returns must have actually been filed more than two years before the bankruptcy; (3) the taxes in question must have been assessed for more than 240 days prior to the bankruptcy; (4) the tax returns must have been non-fraudulent; and (5) the taxpayer must not have been guilty of a willful attempt to evade or defeat the taxes. If a taxpayer does not meet criterion (1) through (3), many times the solution is to wait. If waiting is not practical, then a Chapter 13 payment plan can be considered.


Chapter 13 is a good tool for those who have some cash flow but have Chapter 7 non-dischargeable debts. It can stop a home foreclosure and allow the debtor to pay the past due mortgage over a period of time. It can stop the liquidation of non exempt assets, such as a small business, and allow greater dischargeability of taxes (generally payroll taxes) than a Chapter 7 liquidation allows. The Chapter 13 monthly payments are geared to the debtor’s budget and ability to pay; typically, the payment plan for taxes is from 36 to 60 months. The IRS does not make the final determination of the payment plan; the Bankruptcy Court does. Thus, if a debtor has cash flow in excess of expenses and a Chapter 7 will not solve the problems, a Chapter 13 may be the solution.