There are many different types of debts that can cause difficulty for an individual or family. When money is owed to multiple creditors, a person may struggle to make ongoing payments while also managing their regular expenses. Tax debts can be especially difficult to deal with, since the IRS may take action in several ways to collect taxes that a person owes. The IRS may garnish their wages, seize funds in a bank account, intercept tax returns, or placing a tax lien on real estate or other property. In cases involving IRS tax levies, a debtor will want to understand whether filing for bankruptcy may allow them to discharge their tax debts.

When Can Tax Debts Be Discharged Through Bankruptcy?

As with other types of debts, the collection of tax debts can be stopped by filing for bankruptcy. The automatic stay that goes into effect following a bankruptcy filing will prevent the IRS from implementing tax levies. A debtor can then determine whether the tax debts they owe are eligible to be discharged.

Tax debts can only be discharged if a person has met certain requirements. Only state or federal income taxes can be discharged, so bankruptcy will not eliminate debts for payroll taxes, capital gains taxes, or other types of taxes. In addition, a taxpayer will need to show that:

Try to file bankruptcy before a tax lien gets recorded. But if you can’t, here are the effects of a tax lien under Chapter 7 and 13.

This blog post continues a series about the smart timing of your bankruptcy filing. (It was interrupted by two blog posts updating federal unemployment benefits.) The last in this series was about how good bankruptcy timing prevents you paying certain income tax interest and penalties. We ended with this: “The effect of a tax lien depends on whether the tax at issue qualifies for discharge, and whether you file a Chapter 7 or 13 case.” That’s today’s important topic.

Usually you can discharge—write off—an income tax debt by just waiting long enough. Here’s how to discharge a tax debt under Chapter 7.

Timing is Just About Everything

If you owe an income tax debt and file a Chapter 7 “straight bankruptcy” case, one of two things will happen to that debt:

Catching up on property taxes benefits both you and your mortgage lender. Chapter 13 helps you pull this off under much less pressure.

Slipping Behind on Property Taxes

If you’ve fallen behind on your mortgage payments, you’ve likely also fallen behind on your property taxes.

If you don't have much equity in your home, so that a tax lien eats up all that equity and then some, how can you get rid of that tax lien?

Our last 2 blog posts discussed your options if the IRS or state records a tax lien against your home. We first got into what happens if your home has no equity so that the tax lien does not attach to anything of value. And second we looked at your options if your home has plenty of equity so that there is more than enough to cover the entire amount of the tax lien.