If you’re filing bankruptcy with unpaid taxes there are a few options available. What type of bankruptcy you file and the age of your taxes factor heavily into how unpaid taxes are treated. Let’s take a closer look.
Bankruptcy Discharge of Taxes
If your unpaid taxes became due at least 3 years before filing bankruptcy, they may be eligible for a Chapter 7 bankruptcy discharge. However, current taxes must be repaid after bankruptcy or you could find yourself burdened with more tax debt that could harm your credit rating. Talk to the IRS about setting up a reasonable repayment plan after bankruptcy.
Repayment of Taxes in Bankruptcy
If you’re filing Chapter 13 bankruptcy, your unpaid taxes will be included in your repayment plan as a priority debt. You will be allowed to repay your unpaid back taxes over the course of three to five years. However, if in the course of your three to five year repayment period your financial situation changes and you convert your case to a Chapter 7 bankruptcy, you may be allowed to discharge any unpaid portion of taxes that qualify.
If you’re filing Chapter 13 bankruptcy, your unpaid taxes will be included in your repayment plan as a priority debt.
You will not be allowed to discharge any unpaid taxes in bankruptcy if you were convicted of tax fraud or evasion. If this is the case, the IRS may be empowered to pursue you for repayment even as you process your bankruptcy case.
Taxes That Survive Bankruptcy
While bankruptcy can discharge many tax debts, there are situations when tax debt survives the bankruptcy case. In that situation you may negotiate a settlement amount with the IRS or work out a payment plan. IRS repayment plans typically last 36 months.
It’s important to remember that unpaid taxes can cause serious complications to your post-bankruptcy financial health so be sure to handle them properly.