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Can I get rid of my tax debt through bankruptcy?

On Behalf of | Nov 9, 2019 | Firm News

Bankruptcy delves into areas of emotions you may rather not feel. The issues you bring to the table are sometimes embarrassing. However, with the ability to make payments to lower your debt, you may feel a little more in control of your situation. 

Once your bankruptcy papers are in the hands of a trustee, he or she figures all the money you owe to creditors and formulates a payment plan. If you choose to go through Chapter 13, these plans last between three to five years, and repaying the plan depends on your income. The IRS states you should pay your taxes as they come due. 

The answer to if you can get rid of IRS debt through bankruptcy is tricky. As part of your filed documents, you gave the trustee an accounting of any back taxes you owe. The trustee breaks down the taxes into priority and secured debts. 

Priority claims 

You must pay priority claims in full. They are income tax debts that are usually less than three years old. You may not be able to discharge this tax debt, so the trustee will add it to your payment plan. Because it is a priority claim, the payments you make to your plan will first go toward this debt, and any remaining may go to pay your credit cards. 

Secured debt 

An example of a secured debt is a tax lien. Like priority claims, you must pay these debts in full. The problem is the IRS can classify the debt as secured when it otherwise could be dischargeable. A professional may be able to help you figure out how and why the IRS is choosing to classify the debt as secured and what you can do to change this. 

Some tax debts do not fall under either priority or secured. In other words, they may be dischargeable and you can pay them off like you could credit cards and personal loans. These payments come out of your disposable income.