Wilmoth Law Firm

Menu
479-443-8080

Wilmoth Law Blog

Can You Eliminate Tax Debt in Bankruptcy?

Can You Eliminate Tax Debt in Bankruptcy

Many people in financial distress ask this question as tax bills pile up alongside credit cards, medical debt, and other obligations. The honest answer is: Sometimes you can eliminate tax debt in bankruptcy, but only if very specific rules are met. Understanding those rules before you file can help you choose the right strategy and avoid unpleasant surprises later.

When Can Tax Debt Be Discharged?

Bankruptcy law treats tax debt differently from credit cards or medical bills, and only certain income tax debts ever qualify for discharge. In both Chapter 7 and Chapter 13, your tax debt must meet several timing and conduct requirements before it can be wiped out. For example, these are some of the criteria that must be met for tax debts to be eliminated:

  • The Three‑Year Rule: The tax return for the year you owe must have been due at least three years before you file bankruptcy (including valid extensions).
  • The Two‑Year Rule: You must have actually filed that tax return at least two years before your bankruptcy case.
  • The 240‑Day Rule: The IRS (or state) must have assessed the tax at least 240 days before you file.
  • No fraud or willful evasion: The debt cannot be tied to a fraudulent return or deliberate efforts to avoid paying tax.
  • A valid return: You must have filed a legitimate, honest return; in many courts, an IRS “substitute for return” does not count.


If your income tax debt satisfies all of these conditions, it may be treated like other unsecured debts and discharged in Chapter 7 or paid in part and discharged at the end of a Chapter 13 plan.

What Is the Difference Between Chapter 7 vs. Chapter 13 for Tax Debt?

Chapter 7 and Chapter 13 handle tax debt differently, and the chapter you choose can make a big difference in your outcome.

In Chapter 7 (Liquidation):

  • Qualifying income tax debts that meet all the discharge rules can be wiped out in a matter of months.
  • “Non‑dischargeable” taxes remain due after your case, and tax liens recorded before filing generally continue to encumber your property.
  • You must pass a “Means Test” to qualify, which looks at your income and expenses.


In Chapter 13 (Reorganization):

  • You propose a three‑ to five‑year repayment plan. Priority tax debts (such as recent income taxes) are paid in full through the plan.
  • Older, qualifying tax debts are treated like other unsecured claims and may be paid only in part, with the balance discharged at the end.
  • Interest and penalties on many tax debts stop accruing once you file, and the “automatic stay” can protect you from aggressive collection while you make plan payments.


For some people, Chapter 13 offers meaningful relief even when taxes are not fully dischargeable, because it gives structure, time, and protection while the debt is repaid.

When Tax Debt Cannot Be Eliminated

Many people are disappointed to learn that not all tax obligations are eligible for discharge, even if they are old. Certain kinds of tax debts are considered “priority” and must be paid or simply survive the bankruptcy.

Common examples of tax debts that typically cannot be eliminated include:

  • Recent income taxes: Income taxes for the past three tax years usually remain non‑dischargeable.
  • Payroll and “trust fund” taxes: Amounts withheld from employees’ wages or collected as sales tax are almost never dischargeable.
  • Most tax liens: Bankruptcy may erase your personal obligation, but a pre‑existing lien can still attach to your property.
  • Certain property taxes and non‑income taxes: These are often treated as priority debts and must be paid in full or remain after the case.
  • Penalties tied to non‑dischargeable taxes: If the underlying tax cannot be discharged, associated penalties and interest usually survive as well.


The key takeaway is that bankruptcy is not a “magic eraser” for all tax problems, and you need a careful review of each tax year and type of tax you owe.

Speak to a Fayetteville Bankruptcy Lawyer at Wilmoth Law Firm for Answers to All Your Questions About Eliminating Tax Debt

If you are facing bankruptcy, you may feel overwhelmed and alone. An experienced Fayetteville bankruptcy lawyer at Wilmoth Law Firm is here for you and will evaluate your case. For a free consultation, submit our online form or call today at 479-443-8080. Located in Fayetteville, Arkansas, we gladly serve clients in the surrounding areas.