Can Filing Bankruptcy Stop IRS Collections?

It appears that nearly everyone has an opinion about Chapter 7 or Chapter 13 bankruptcy – and they are all willing to share their opinions publicly. From gut-wrenching statements that you are likely to lose your home to fear-inducing assertions regarding the black mark the bankruptcy case will leave on your credit score for decades, there is no doubt that these opinions can create stress and fear.

A common misconception about bankruptcy is that you can’t discharge your IRS tax debts. No one knows where this rumor started, but you should know that it’s not true. Filing for bankruptcy can discharge (wipe out) all your old tax debts that meet the qualifications set by the bankruptcy law. According to Walter Benenati, an expert in the bankruptcy law, bankruptcy can offer you a chance to pay back recently assessed tax debts at an amount that is lower than what the IRS would be ready to offer.

Bankruptcy can stop the IRS

Once you file a bankruptcy case, the automatic stay (an injunction – a type of court order) goes into effect. This injunction is intended to stop your creditors such as IRS from the beginning or continuing their collection activities such as garnishing your bank account or wages, offsetting your tax refund, sending you letters, or even filing liens against your assets.

The automatic stay continues during the entire bankruptcy case period. However, it can be lifted by the court after a request filed by a creditor for a good reason. Once your case is over, the IRS can resume their collection activities unless your tax debt has been paid in full or wiped out. Remember, the automatic stay will go into effect after filing for bankruptcy for the first time. But this is not always the case for all other subsequent filings.

Tax debts that can be discharged

During bankruptcy, debtors can discharge some debts but not all. Only tax debts that meet the following criteria can be discharged.

  • Taxes on gross receipts and wage-related income
  • All income taxes that were due three years or more before you file for bankruptcy
  • Probably you filed your tax return two years before you filed for bankruptcy. Or the IRS filed a substitute return for you. In such cases, some bankruptcy courts rule that those taxes don’t qualify wipe-out (discharge).
  • If IRS assessment occurred at least 240 days before you filed for bankruptcy, this period might be lengthened if you had filed a previous bankruptcy case or had pending an offer in compromise.
  • You didn’t attempt to evade to pay tax willfully or commit fraud during the period in question.

Note that if you meet all these requirements, the chances are that your tax debt will be discharged. If you don’t, your tax obligation won’t be wiped out even after filing for bankruptcy. Remember bankruptcy cases are complicated and you need an experienced attorney to handle it successfully.