Chicago Bankruptcy Question: How is income tax debt treated in Chapter 7?

Chicago Bankruptcy Question of the Day: How is income tax debt treated in Chapter 7?  As with most questions involving creditors in bankruptcy, the answer is "it depends".  When you file for Chapter 7 bankruptcy protection in Chicago, you are required to schedule and notice must be given to all of your creditors.  This includes the Internal Revenue Service, Illinois Department of Revenue and any other taxing authority to whom you may owe income taxes to.

Upon filing for Chapter 7, the automatic stay of bankruptcy is issued which, in essence, is an injunction againgst all of your creditors, prohibiting any further collection actions from them.  The automatic stay is effective in keeping the IRS or IDOR from taking any further collection actions against you while your Chapter 7 case is active.  The real issue, of course, is whether or not they will be able to collect from you after your Chapter 7 discharge has been granted.

In a Chapter 7 bankruptcy, some income tax debts can be discharged.  As a basic and general rule, income tax liability that arose from a tax return that was timely filed and the filing date was more than three years prior to the filing of the Chapter 7 can be discharged.  There are, of course, exceptions to this general rule.  If the debt has been reassessed within the 240 days prior to the bankruptcy filing, other than where an offer in compromise was pending, it will likely not be discharged.  If the debt was caused by fraud or tax evasion, it will likely not be discharged.  Other than those limited exceptions, income tax debts more than three years old will likely be discharged in a Chapter 7 bankruptcy filing.

Income taxes less than three years old, those assessed within 240 days of the date of bankruptcy filing and those created by fraud or tax evasion will not be discharged in a Chapter 7 bankruptcy filing.  You may be able to effectively address and repay the non-dischargeable income tax debt through a Chapter 13 bankruptcy filing, an IRS Offer in Compromise or through a repayment plan set up directly with the taxing authority.

If you have significant income tax debts and are considering filing for Chapter 7 bankruptcy protection in the Chicago area, it is vital that you have the representation of an experienced bankruptcy attorney.  Recognizing what income tax debts are dischargeable in bankruptcy and strategically timing the filing of your Chapter 7 bankruptcy to maximize that discharge is something that requires the skills and knowledge of a bankruptcy attorney who truly knows the craft.  The experienced Chicago bankruptcy lawyers at Ledford & Wu have successfully handled thousands of cases with income tax issues and are happy to offer you a free consultation to discuss your options.

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