Taxes in Bankruptcy

A common area of confusion among bankruptcy debtors is over dischargeability of income tax liability. The rules about income taxes in bankruptcy are complex. The new bankruptcy law made significant changes in tax dischargeability making it more difficult to eliminate tax debt in Chapter 13 bankruptcy. The first question in tax analysis is whether or not the IRS has filed a tax lien to enforce collection of past due taxes. Generally speaking, income taxes are unsecured debts in bankruptcy. Taxes themselves are priority unsecured debts and get paid in full prior to any money going to general unsecured creditors. Tax debt related to interest and penalties are not priority, and this part of a total IRS claim is treated the same as any other unsecured debt like credit card debt. Some priority and unsecured tax debts is dischargeable in either Chapter 7 or Chapter 13 bankruptcy.

Even through the IRS cannot foreclose a tax lien on homestead, the secured tax lien must be paid in full whenever the debtor sells or refinances.  Both Chapter 7 bankruptcy and Chapter 13 bankruptcy can eliminate some portion of priority and unsecured  tax debt, the general rule (with exceptions)  is  taxes covered by tax liens cannot be discharged in bankruptcy.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida