Many people assume that tax debt can never be discharged in bankruptcy. That assumption is incorrect. While some taxes survive bankruptcy, others can be eliminated or managed effectively depending on the type of tax, how old it is, and whether certain legal requirements are met. Understanding these distinctions is critical before filing.

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Income Taxes That May Be Discharged

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Federal, state, and local income taxes may be discharged in a Chapter 7 bankruptcy if all of the following conditions are met:

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• The tax return was due at least three years before the bankruptcy filing date (including extensions). 
• The tax return was actually filed at least two years before filing. 
• The tax was assessed at least 240 days before filing. 
• The return was not fraudulent, and there was no willful attempt to evade or defeat the tax.

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If these rules are satisfied, qualifying income tax debt can be completely eliminated in Chapter 7. In Chapter 13, the same taxes may be treated as unsecured debt and paid little or nothing through the plan.

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Taxes That Are Not Dischargeable

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Certain tax obligations generally cannot be discharged, including:

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• Recent income taxes that do not meet the timing rules 
• Payroll and trust fund taxes 
• Sales tax collected from customers 
• Tax penalties tied to non-dischargeable taxes 
• Taxes arising from unfiled or fraudulent returns

 

Even when these taxes cannot be discharged, bankruptcy can still be useful. Chapter 13 allows repayment over three to five years, often without additional penalties or aggressive collection activity.

 

Tax Liens in Bankruptcy

 

A tax lien complicates matters. While bankruptcy may discharge personal liability for the tax, a properly recorded tax lien can survive and continue to attach to property owned before filing. In some cases, the lien can be limited to the value of non-exempt assets or paid over time in Chapter 13.

 

Ongoing Tax Issues

 

Bankruptcy does not eliminate the obligation to file future tax returns or pay future taxes. In fact, staying current on post-filing taxes is mandatory in Chapter 13 and strongly advised in all cases.

 

When Bankruptcy Makes Sense for Tax Debt

 

Bankruptcy may be appropriate if:

• You owe older income taxes and meet the discharge rules 
• IRS or Ohio Department of Taxation collections are aggressive 
• Wage garnishments or bank levies are ongoing 
• You need structured repayment without escalating penalties

 

A careful review of transcripts and filing history is required before filing. Timing matters, and filing too early can eliminate discharge options.