Conventional wisdom is that taxes are not dischargeable in bankruptcy. However, depending on the type of taxes and when those taxes were originally
due, conventional wisdom can be very, very wrong.
You can in fact discharge federal, state, and some local taxes as part
of the two most common forms of bankruptcy filed by individuals –
Chapter 7, or liquidation bankruptcy, and Chapter 13, also known as a
repayment plan bankruptcy – if certain very specific conditions are met.
Federal bankruptcy code sets up very specific time-limit-based guidelines
for which taxes can be discharged under what is commonly known as the ‘3-2-240 rules’. Under these rules, you can discharge taxes that were originally
due no less than three years prior to the date on which you filed for
bankruptcy, provided that it has been at least two years since you filed
the relevant tax forms and at least 240 days since the taxes were assessed
There are a number of factors that may affect how the rule is applied to
your personal situation. For instance, if you requested a filing extension
on campus your taxes, the three year-clock starts on the day the taxes
are due under the extension.
What the two-year rule means is that any taxes you are trying to discharge
must have been assessed against you at least two years prior to the date
you filed for bankruptcy. For instance, if you filed for bankruptcy in
2016, you can discharge taxes from 2014 and prior, but not from 2015 or 2016.
The 240-day rule simply means that the taxes must have been assessed against
you a minimum of 240 days prior to the date on which you filed for bankruptcy.
While these rules may seem simple, the reality is far from simple, and knowing how to use these rules for your benefit can be the difference
between a successful tax discharge and an unsuccessful one. A number of
factors can affect the timetable associated with the rules, such as tax
disputes, tax challenges, audits and extensions.
For these reasons, if you are considering bankruptcy and have taxes you
would like to discharge, you should discuss your specific tax situation
with a bankruptcy attorney.
An experienced bankruptcy attorney will be able to guide you to making
the best decisions for your personal financial situation, and will fight
for your right to a fair bankruptcy settlement.
Contact us today if you think bankruptcy may be right for you.