IRS Debt Chapter 7: When Bankruptcy Can Wipe Out Tax Debt

IRS Debt Chapter 7 Rules: What You Need to Know

IRS debt Chapter 7 is a legal pathway that may allow you to eliminate certain tax debts through bankruptcy. But not all IRS debts are eligible. Specific rules must be met for your tax liability to be discharged under Chapter 7. Understanding how this works can help you decide whether bankruptcy is the right option for your situation.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is also known as “liquidation” bankruptcy. It allows individuals to eliminate unsecured debt, like credit cards or medical bills, by liquidating non-exempt assets.

Liquidation of Assets Explained

In Chapter 7, a court-appointed trustee may sell certain assets to repay creditors. However, many people keep most or all of their property through state or federal exemptions.

How Chapter 7 Differs From Chapter 13

Unlike Chapter 13, which involves a repayment plan over three to five years, Chapter 7 discharges qualifying debt within a few months. There’s no structured repayment for most types of debt, including qualifying tax debt.

When IRS Tax Debt Qualifies for Chapter 7 Discharge

To have IRS debt discharged under Chapter 7, the tax liability must meet all of the following timing rules:

The 3-Year Rule (Tax Return Due Date)

The tax debt must relate to a return that was due at least three years before the bankruptcy filing date.

The 2-Year Rule (Filing Date)

You must have filed the tax return at least two years before filing for bankruptcy. If the IRS filed a substitute return on your behalf, this rule might not be met.

The 240-Day Rule (Assessment Date)

The IRS must have assessed the tax at least 240 days before your bankruptcy case began. This rule ensures the IRS has time to act before your filing.

If your tax debt doesn’t meet all three of these criteria, it likely won’t be dischargeable under Chapter 7.

Types of IRS Debt That May Not Be Discharged

Even if you meet the above rules, some types of IRS debt are automatically excluded from discharge.

Recent Tax Debt and Fraudulent Returns

If you filed a return with intentional fraud or willfully attempted to evade taxes, the debt cannot be erased. Likewise, debts from recent tax years that fall outside the 3-year window remain collectible.

Payroll Taxes and Trust Fund Penalties

Business owners with unpaid payroll taxes or trust fund recovery penalties cannot eliminate these through bankruptcy. These are considered high-priority debts by the IRS.

If you’re unsure whether your tax type qualifies, a free tax case review can help clarify your options.

Filing Process and What to Expect

If you’re considering using Chapter 7 to address IRS debt, it’s important to understand the process and protections it offers.

Required Documentation and Tax Records

You’ll need to submit proof of income, a list of debts, tax returns, and financial disclosures. The court will review whether your tax debt meets the discharge rules.

Automatic Stay and IRS Collection Halt

Once you file, the automatic stay takes effect. This legally blocks the IRS from garnishing wages, seizing bank accounts, or sending collection letters. However, the stay is temporary and doesn’t erase the debt unless the court discharges it.

Will Chapter 7 Wipe Out Your IRS Debt?

It depends. If your IRS debt meets the age, filing, and assessment rules—and it’s not tied to fraud or payroll taxes—then yes, Chapter 7 can eliminate your IRS debt.

Timing matters. Filing too early could cause your tax debt to survive the bankruptcy process. Consider speaking with a qualified tax attorney who can guide you through the best timeline and strategy.

Find Out if IRS Debt Chapter 7 Applies to You

Filing Chapter 7 can be a powerful way to resolve tax debt—but only if you meet the rules. Whether you’re unsure about IRS deadlines or don’t know if your return qualifies, TaxDebtLawyer.net connects you with attorneys who:

• Analyze your IRS account history
• Review bankruptcy timing and eligibility
• Help you file the right forms
• Protect your assets through legal exemptions

Contact us today to schedule a consultation and learn whether IRS debt Chapter 7 is the right solution for your situation.

Frequently Asked Questions (FAQs)