Chapter 7 IRS Debt: How Bankruptcy Affects Tax Liability

Chapter 7 IRS Debt Rules: Can Bankruptcy Clear Tax Debt?

Chapter 7 IRS debt discharge is possible—but only in specific circumstances. If you’re overwhelmed with back taxes and considering bankruptcy, you should understand which IRS debts may be eliminated and which are non-dischargeable under federal law. Not all tax debt goes away just because you file for bankruptcy.

When IRS Debt Is Dischargeable in Chapter 7

Not all tax debt qualifies for discharge in Chapter 7. However, if the debt meets certain time-based and filing-related conditions, it may be eliminated just like credit cards or medical bills.

The 3-Year, 2-Year, and 240-Day Rule

To qualify for discharge:

• The tax return must have been due at least 3 years before filing bankruptcy.
• The return must have been filed at least 2 years before the filing date.
• The IRS assessment must be at least 240 days old.
  All three must be true for the tax debt to be considered eligible.

Must Be Income Tax Debt

Only personal income tax is dischargeable in Chapter 7. Other types of tax, such as payroll taxes or penalties for tax fraud, are not eligible for discharge.

No Tax Fraud or Willful Evasion

If the IRS believes you filed a fraudulent return or intentionally evaded taxes, you cannot discharge that debt in bankruptcy, no matter how old it is. Learn more about tax fraud exceptions and eligibility in this breakdown of IRS enforcement risks.

IRS Debts That Can’t Be Discharged

Certain tax-related debts are never eligible for discharge in Chapter 7, regardless of age or filing history.

Trust Fund Taxes and Penalties

These include employment taxes withheld from employee paychecks. Even in bankruptcy, you’re personally liable for trust fund taxes.

Recent Tax Debts or Unfiled Returns

If you haven’t filed your taxes or your debt is from recent tax years, those debts are automatically ineligible for discharge.

Debts Tied to Fraud or Criminal Acts

Tax evasion, fraudulent returns, or failure to file returns to avoid tax liability will make those debts non-dischargeable.

How Chapter 7 Works with the IRS

Chapter 7 bankruptcy can offer a fresh start, but it doesn’t guarantee freedom from IRS debt unless you meet strict requirements.

Role of the Bankruptcy Trustee

The trustee will review your assets to determine if any can be sold to repay creditors. The IRS is treated like any other unsecured creditor for dischargeable taxes.

IRS and the Automatic Stay

As soon as you file, an automatic stay goes into effect. This prevents the IRS from garnishing wages, levying accounts, or sending collection notices during the bankruptcy. Learn more about wage garnishment and how bankruptcy may help stop it.

Discharge Timeline

If your tax debt meets the rules, it will be wiped out when the court issues the final discharge order, usually within 3–6 months of filing.

Alternatives to Chapter 7 for IRS Debt Relief

If your IRS debt doesn’t qualify for discharge under Chapter 7, there are still other options to consider.

Chapter 13 Payment Plans

Under Chapter 13, you can create a 3- to 5-year repayment plan that includes IRS debt, regardless of whether it’s dischargeable.

Offer in Compromise (OIC)

An OIC allows you to settle IRS debt for less than you owe. It’s based on financial hardship and must be submitted directly to the IRS.

Currently Not Collectible (CNC) Status

If you’re unable to pay and have no disposable income, the IRS may pause collection efforts. This status isn’t permanent but offers temporary relief.

Know What Chapter 7 Can Do for IRS Debt

Understanding Chapter 7 IRS debt rules is critical if you’re considering bankruptcy. While some older income taxes can be eliminated, recent debts, fraud-related taxes, and payroll obligations are exceptions. A bankruptcy attorney or tax relief expert can review your case and determine whether Chapter 7 is the best path.

Speak With a Tax Relief Attorney About Chapter 7 IRS Debt

If you’re unsure whether your tax debt qualifies for discharge, contact us today. Our experienced tax professionals and legal partners can review your IRS records, explain your options, and help you resolve back taxes—either through bankruptcy or IRS-approved alternatives.

Frequently Asked Questions (FAQs)

1. Can IRS debt be erased in Chapter 7?

Yes, if it’s income tax debt that meets all the timing and filing rules.

2. What IRS debt is not dischargeable?

Payroll taxes, trust fund taxes, fraud penalties, and recent tax liabilities cannot be erased.

3. Do I have to file all back tax returns before filing Chapter 7?

Yes. Unfiled returns make associated debts ineligible for discharge.

4. Will the IRS stop collections during bankruptcy?

Yes, the automatic stay halts IRS collections, including garnishments and levies.

5. Is Chapter 13 better than Chapter 7 for tax debt?

It depends. Chapter 13 may help if you need time to repay nondischargeable IRS debt.

Key Takeaways

• Chapter 7 IRS debt discharge depends on strict rules and timelines.
• Only income tax, not fraud-related or payroll tax—may be erased.
• You must file all past returns for debt to qualify.
• The automatic stay offers immediate relief from IRS collections.
• Legal guidance is essential to avoid errors and protect your rights.