IRS Debt and Chapter 7: Can Bankruptcy Erase Tax Debt?

How IRS Debt and Chapter 7 Bankruptcy Interact

IRS debt and Chapter 7 bankruptcy often come up together for individuals facing overwhelming financial pressure. While many believe bankruptcy can never discharge tax debt, that’s only partially true. Under the right conditions, Chapter 7 can wipe out certain income tax debts. Understanding how these two processes work together can help you make informed decisions about tax relief and financial recovery.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy helps eliminate unsecured debts and gives individuals a fresh start. People often call it “liquidation” bankruptcy because the trustee may sell some non-exempt assets to pay creditors.

Basic Overview of Chapter 7

In most Chapter 7 cases, the court discharges eligible debts such as credit cards and medical bills within a few months. The court appoints a trustee to manage the case and handle any non-exempt property.

Who Qualifies for Chapter 7?

To file, you must pass a means test, which compares your income to your state’s median. If your income is too high, the court may direct you toward Chapter 13 instead. For more information on related relief options, visit our legal help page.

Which IRS Debts Can Be Discharged in Chapter 7?

Not all tax debt qualifies for discharge, but many older income tax debts can be erased under specific rules.

Income Tax Debts Only

Chapter 7 can discharge only personal income taxes. The law excludes payroll taxes, trust fund taxes, and penalties for tax fraud.

Age of the Tax Debt

The IRS must have set the tax return’s due date at least three years before the bankruptcy filing. For example, 2020 tax returns due in April 2021 may qualify if you file bankruptcy after April 2024.

Filing and Assessment Requirements

You must file the return at least two years before filing bankruptcy, and the IRS must assess the tax at least 240 days before. These three rules make up the “3-2-240 rule.”

What IRS Debts Cannot Be Discharged?

Bankruptcy law protects some types of IRS debt from discharge.

Trust Fund Taxes and Fraud Penalties

If you withheld taxes from employees or committed fraud, you remain responsible for those debts, regardless of bankruptcy.

Recent Tax Debts

If you owe taxes from the past one or two years, they likely won’t qualify unless the timing conditions above are met.

How Bankruptcy Affects IRS Collections

One of the biggest benefits of Chapter 7 is that it temporarily stops collection activity.

Automatic Stay Protection

Once you file, the court issues an automatic stay, which stops the IRS from:

• Sending collection letters
• Garnishing wages
• Levying bank accounts

IRS Actions During Chapter 7

While the case is active, the IRS must stop all collection efforts. However, the IRS may resume collections if it does not discharge the debt and the court lifts the stay.

Pros and Cons of Using Chapter 7 for IRS Debt

Chapter 7 can provide quick relief, but it’s not a perfect solution.

Benefits for Eligible Taxpayers

• Chapter 7 discharges qualify for income tax debts.
• Halts collections immediately
• Offers a faster resolution than Chapter 13

Risks and Limitations

• Doesn’t discharge all tax debt
• The IRS may keep its liens after the bankruptcy.
• Non-exempt property may be sold

IRS Debt and Chapter 7: Know What Can Be Erased

If your tax debt is older, fully assessed, and meets the 3-2-240 criteria, Chapter 7 may allow you to discharge it. However, timing is everything. A small mistake in your filing date or return history could cause the debt to remain after bankruptcy. Careful planning is key.

Need Help With IRS Debt and Chapter 7 Bankruptcy?

Bankruptcy and tax law are complex, and the intersection between the two is even more so. If you’re overwhelmed by IRS debt, consulting a qualified bankruptcy attorney or tax relief professional can help you understand your eligibility and protect your assets. Don’t guess—contact us to get expert support navigating IRS collections and Chapter 7 today.

Frequently Asked Questions (FAQs)