Many Minnesotans in the Twin Cities metro area, as well as greater Minnesota, owe tax debt to the IRS and/or the State of Minnesota. Filing for bankruptcy can help make tax debt more manageable, and in some circumstances, can get rid of tax debt altogether. How tax debt is treated in bankruptcy depends upon the type of tax debt as well as whether a person files a chapter 7 or chapter 13 bankruptcy case.
The general rule is that tax debt is not dischargeable in bankruptcy, meaning the tax debt is not wiped out forever after the person’s bankruptcy case is done, like most other debts, and the person will remain responsible for paying the debt (unless it’s paid in a chapter 13 repayment plan). Tax debt that is not dischargeable in bankruptcy includes recent income tax debt, property tax debt, and payroll tax debt. However, as an exception to the rule, older income tax debt is dischargeable if it meets certain requirements. First, the income tax must have been due at least 3 years before the person filed their bankruptcy case. For example, tax debt from the year 2018, that was due on April 15th, 2019, is possibly dischargeable if a person files their case after April 15th of 2022. Second, the tax debt is only dischargeable if the tax returns were filed more than two years before the person files their bankruptcy case. Lastly, in order for the tax debt to be dischargeable, the debt cannot have been assessed by the IRS or Minnesota Department of Revenue in the 840 day (8 month) period prior to the person’s bankruptcy case being filed. This requirement can be a bit fuzzy, but basically, the requirement is satisfied so long as the IRS or State hasn’t re-reviewed the person’s taxes within this time period. If all of these requirements are met, the taxes should be discharged in a person’s bankruptcy case.
If a person files a chapter 7 case, any dischargeable tax debt they have will be wiped out by the discharge forever. For this reason, people with a lot of old income tax debt are often well served by filing a chapter 7 case. They will be stuck with their non-dischargeable tax debt after their case is done though. When a person files a chapter 13 bankruptcy case, any dischargeable tax debt is treated as all other unsecured debts. Typically, a small portion, if any, of the dischargeable debt, along with the other unsecured debts are paid out of the person’s chapter 13 payments, and the remaining unpaid debt gets wiped out with the discharge. This dischargeable debt is called “non-priority” tax debt. Any tax debt that is not dischargeable is known as “priority’ tax debt. Bankruptcy law requires the debtor to pay all of their non-dischargeable priority tax debt in their three to five year chapter 13 repayment plan. For this reason, persons with a large amount of non-dischargeable tax debt are often well benefited from filing a chapter 13 repayment plan (assuming they earn enough to be able to afford their monthly payments), so that they may pay their tax debt over time through their plan.
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Filing a chapter 7 or 13 bankruptcy case can be a great way to allow a person to pay down the tax debt over time and/or get rid of tax debt altogether in some circumstances. LifeBack Law, P.A. is happy to help people who live in Saint Paul, as well the rest of Minnesota, get that fresh start that they need. We now have an office located at 370 Selby Ave., Suite 224, Saint Paul Minnesota 55102. Come visit us there or at Lifebacklaw.com!