Does Bankruptcy Erase Tax Debt?

A friend who has serious credit card problems. He is self employed but has been living `beyond her means` for some time thanks to credit cards. Now I discover, the taxman is after his, and for good reason. Does Bankruptcy Erase Tax Debt?

The answer to that question is – most likely, not.  First of all, bankruptcy is a very serious thing and you must not enter into the decision to file bankruptcy lightly. Bankruptcy has long-term negative impacts.  There are two types of bankruptcies for you to consider before deciding which might be right for your circumstances.

Chapter 7 is liquidation bankruptcy.  Under this arrangement, all your debt is liquidated, non-exempt and dis-chargeable, alike.  Income Tax debt over three years old could be all or mostly erased.  More recent tax debt cannot be included.

Chapter 11, 12, or 13 is repayment bankruptcy.  Under this arrangement you are able to repay your debt during a lengthened amount of time.  Your taxes must be repaid within a specific amount of time, just like the rest of your debt.

So, obviously, bankruptcy should be a last resort, not a first option when trying to eliminate a large amount of delinquent taxes. It is tempting to go with bankruptcy because it sounds familiar. It is also tempting to call one of those numbers on TV and let someone else deal with it. But keep in mind that those attorneys have a vested interest in “helping” you with your tax debt; they take a portion of what they save.

You can save yourself a lot of money, time, effort and heartache by working with the IRS. Yes, it is scary to consider calling the IRS and asking for help; our image of this agency is that they are abusive and difficult to deal with. The reality is that they want the money owed, and they will work with you to help you pay off your debt. It is in their best interest to help you.

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