It’s true that bankruptcy gives you a financial fresh start and ends your financial worries in as little as 90 days. Bankruptcy discharges all your outstanding debt and gives you a clean slate. However, is the same set of rule applied, when it comes to unpaid tax debt? More specifically, will it be possible to discharge your tax debt through bankruptcy? If you are presently struggling with insoluble debts and you have no other option of debt elimination except bankruptcy, then you must know that you can either make payments on your tax debt or can discharge the tax debt altogether through bankruptcy. Read ahead, to decipher the intricate relation between bankruptcy and tax return.

Chapter 7 Bankruptcy

If you are forced to file chapter 7 bankruptcy, as an immediate consequence your non- exempt assets and other unsecured debts will be liquidated to reimburse your outstanding debts. Taxes are regarded as unsecured debt, which means they are priority debt and so would remain non dischargeable in a bankruptcy case. However, few exceptions are there. You can simply discharge your tax debt as a regular unsecured debt, provided your tax debt is over three years old, and you have already filed a tax return. However, in order to be eligible to file chapter 7 bankruptcy, you have to stay below your state’s median income for the tax year.

Chapter 13 Bankruptcy

Under chapter 13 bankruptcy a debtor is allowed to make payments on tax debt and pay off the tax debt within a three to five year period of time. According to a chapter 13 plan, regular tax debt won’t be discharged in any way, but any interest fees on unpaid taxes that are regarded unsecured debt could be easily discharged. If you continue making chapter 13 payments in a timely manner the Internal Revenue Services won’t garnish your wages or pursue any collection activity any more. If you would like to receive bankruptcy protection and can afford to repay your tax debt on a repayment plan, Chapter 13 bankruptcies could certainly help you out

Settled debt

You can “settle” your debt and eliminate a considerable portion of your debt amount, before filing for bankruptcy. However, you will be liable to pay that “forgiven” amount as tax return over the years and this income tax won’t be discharged through bankruptcy as well.

Last but not the least, if you are found guilty of income tax evasion or of filing inaccurate tax returns, criminal charges could be filed against you and you might be barred from filing a bankruptcy in these circumstances. However, even under this situation, you can declare a chapter 13 bankruptcy and can arrange for a repayment plan for your tax debt.