How is tax debt treated in bankruptcy?

On Behalf of | Sep 29, 2022 | Bankruptcy |

If you become overwhelmed with debt, you may want to consider filing bankruptcy. If you owe back taxes, you may wonder what will happen to these liabilities in bankruptcy.

Taxing authorities are aggressive debt collectors. A bankruptcy will temporarily stop collection efforts, but the ultimate disposition of your tax debt depends on its classification.

Priority taxes

You cannot discharge priority taxes in bankruptcy. If you file for Chapter 13, you must pay your priority tax debt through the plan. Priority tax debts include withheld taxes, such as sales and meals. Certain tax debts owed to localities, such as real estate taxes, are priority taxes if incurred within a year of filing bankruptcy. Other types of taxes getting priority treatment include Income taxes you filed within three years before the bankruptcy.

Secured taxes

Sometimes, the taxing authority files a lien at the local courthouse. The taxes included in the lien get treated as a secured debt. Secured taxes are not dischargeable in a bankruptcy, and you might have to pay them off if you file a Chapter 13. You will only have to pay a total amount equal to the value of the property that secures the lien.

Unsecured non-priority taxes

You can discharge your tax debt if it is an unsecured, non-priority tax. Income taxes from returns you filed more than three years before filing the bankruptcy qualify for discharge if the taxing authority has not filed a lien.

Tax debt is often burdensome to those that owe it. You will want to know if bankruptcy can help you.