Bankruptcy Will Allow You to Get Rid of Most State & Federal Income Tax Debt

In fact, this why I practice tax and bankruptcy law – because bankruptcy can be used in some cases to get rid of tax debt. As a tax lawyer, I know when and how bankruptcy can be used to discharge tax debt. Many bankruptcy attorneys don’t.

There are a few exceptions to getting rid of tax debt with bankruptcy. The most frequent is failure to file a timely tax return. For example, if you owe $10,000 on 2015 tax debt, but didn’t file your 2015 return, you can never discharge those taxes with bankruptcy. (The government really, really wants you to file your tax returns.) How does the IRS know what you owe if you haven’t filed? They’ve either calculated it from the W2s or 1099s your employers filed with the IRS, or the IRS is making a guess. The IRS’ guess, by the way, never includes deductions, so you are always coming out worse off than if you filed your own return.

Bankruptcy also cannot be used to get rid of back payroll taxes, which business owners are personally liable for. Payroll taxes are withheld from employee’s paychecks (for social security and medicare payments) and the employer is legally obligated to turn those taxes over to state or federal tax agencies. If they fail to do so, then the IRS views this as theft by the employer of the employee. The IRS won’t condone theft by allowing employers to get out of paying the government what they withheld by filing bankruptcy.

There are also some very picky and complicated timing issues involved with getting rid of taxes in bankruptcy that are too boring go into now, but which are vital to know about in order to actually get the taxes discharged. Many bankruptcy attorneys and preparers don’t understand how and when taxes can be discharged. Make sure yours isn’t one of them if you have back taxes you owe. Better yet, give me a call if you have a lot of tax debt since this is my expertise.

Bankruptcy Won’t Allow You to Get Rid of Most Student Loan Debt

Student loans are one of the few types of common debt that are usually not dischargeable in bankruptcy. If your student loans went to pay tuition, room & board, or school supplies, then that debt is almost certainly not dischargeable in bankruptcy. However, in the uncommon case that you have loans that were for living expenses in excess of what it cost to attend school, then that amount may be dischargeable. The specific language on those loan documents is critical here. Give me a call: I have helped several people get rid of student loan debt, when they had the type of loans that can be discharged in bankruptcy.

May 7, 2021

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