Question 1

Can bankruptcy get rid of my tax debt?

Accepted Answer

Some tax debts can be discharged in bankruptcy, but many cannot. Older personal income taxes may be wiped out in Chapter 7 if they meet specific timing and filing rules, while recent income taxes, payroll (trust fund) taxes, and taxes tied to fraud generally survive. Because the rules are technical, it is worth having an attorney review your specific tax years before you file.

Question 2

Which taxes are most likely to be dischargeable in Chapter 7?

Accepted Answer

Federal and Alabama personal income taxes are the type most commonly eligible for discharge. To qualify, they generally must be income taxes for a return that was due at least three years ago, that you actually filed at least two years ago, and that the taxing authority assessed at least 240 days ago, with no fraud or willful evasion involved. Other taxes, such as payroll and sales taxes, usually do not qualify.

Question 3

What is the '3-year, 2-year, 240-day' rule for discharging taxes?

Accepted Answer

These are the core timing tests for discharging income taxes. The return must have been due (including extensions) more than three years before filing, the return must have been on file with the taxing authority more than two years before filing, and the tax must have been assessed more than 240 days before filing. All three tests, plus the absence of fraud, generally must be satisfied for the tax to be dischargeable.

Question 4

Are payroll taxes or 'trust fund' taxes dischargeable?

Accepted Answer

Generally no. Taxes that an employer withholds from employee wages, often called trust fund taxes, are considered money held on behalf of the government and are excluded from discharge. If you are a business owner or responsible person facing a trust fund recovery penalty, bankruptcy usually will not eliminate that liability, though it may help you manage other debts.

Question 5

Will filing bankruptcy stop the IRS or Alabama Department of Revenue from collecting?

Accepted Answer

Yes. When you file, the automatic stay immediately halts most collection activity, including levies, wage garnishments, and bank seizures by both the IRS and the Alabama Department of Revenue. This pause gives you breathing room while your case proceeds, though the taxing authorities can still take limited actions such as issuing a notice of deficiency or auditing a return.

Question 6

What happens to a tax lien in bankruptcy?

Accepted Answer

A properly recorded tax lien is treated as secured debt and generally survives bankruptcy, even when the underlying tax is otherwise dischargeable. That means the lien can still attach to property you owned when it was filed, though the IRS's ability to collect against you personally may be eliminated. Handling tax liens can be complex, so consider calling 334-366-6086 to discuss how a lien affects your property.

Question 7

How does Chapter 13 handle taxes I owe?

Accepted Answer

Chapter 13 lets you repay tax debt through a structured three-to-five-year plan rather than all at once. Priority taxes, typically your more recent income taxes, must be paid in full over the plan, while older, non-priority taxes may be discharged along with other unsecured debt. A key benefit is that the plan can stop additional penalties and often interest from piling up while you catch up.

Question 8

Do I have to file my tax returns before I can file bankruptcy?

Accepted Answer

Yes, being current on tax filings is important. In Chapter 13 you generally must have filed all required returns for the prior four tax years before your case can be confirmed, and unfiled returns can prevent taxes from ever becoming dischargeable in Chapter 7. If you have missing returns, getting them filed is usually the first step your attorney will recommend.

Question 9

Can bankruptcy remove penalties and interest on my taxes?

Accepted Answer

It depends on the type of tax and chapter. Interest generally follows the tax itself, so if the underlying tax is dischargeable the related interest often is too, while penalties on dischargeable taxes may also be eliminated. In Chapter 13, penalties are frequently treated as general unsecured debt that may be paid at a reduced amount or discharged, even when the tax must be repaid in full.

Question 10

Is a tax lien different from the tax debt itself?

Accepted Answer

Yes, and the distinction matters. The tax debt is your personal obligation to pay, while a tax lien is a legal claim recorded against your property to secure that debt. Bankruptcy may eliminate your personal liability for an old income tax, but a recorded lien can remain attached to property you owned when it was filed, so both pieces need to be addressed separately.

Question 11

Should I choose Chapter 7 or Chapter 13 if my main problem is tax debt?

Accepted Answer

The right chapter depends on how old your taxes are, whether they meet the discharge rules, and whether liens are involved. Chapter 7 may fully eliminate qualifying older income taxes, while Chapter 13 is often better when you owe recent priority taxes that must be repaid but you need time and protection from collection. An attorney can review your tax transcripts and recommend the approach that fits your situation.

Question 12

How can a bankruptcy and tax attorney in Dothan help with my situation?

Accepted Answer

Tax discharge questions turn on precise dates, transcripts, and filing history, and a small error can mean the difference between eliminating a debt and being stuck with it. An attorney can order your IRS and state account transcripts, confirm which tax years qualify, and design a strategy that addresses both the debt and any liens. If you owe taxes and are in Houston County or the Wiregrass region, call 334-366-6086 for a consultation.

Bankruptcy and Taxes

Bankruptcy And Tax Attorney

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