Can income taxes be discharged in Chapter 7 Bankruptcy? Chapter 11 Bankruptcy?

In general, income taxes are not dischargeable in Chapter 7 bankruptcy. This means that if you file for Chapter 7 bankruptcy, you will still be responsible for paying any outstanding income taxes that you owe.

There are some limited circumstances under which income taxes may be dischargeable in Chapter 7 bankruptcy. To be dischargeable, the taxes must meet all of the following criteria:

1. The taxes must be income taxes (as opposed to payroll taxes or other types of taxes).
2. The taxes must be at least three years old.
3. The tax return for the taxes must have been due at least three years prior to the date you file for bankruptcy.
4. You must have filed a tax return for the taxes at least two years prior to the date you file for bankruptcy.
5. You must not have committed fraud or tax evasion with respect to the taxes.

If the taxes you owe meet all of these criteria, they may be dischargeable in Chapter 7 bankruptcy. However, it is important to note that the IRS and other taxing authorities have the right to challenge the dischargeability of the taxes and may do so if they believe that you are not eligible for a discharge.

In Chapter 11 bankruptcy, income taxes may be dischargeable under certain circumstances. However, the process for discharging taxes in Chapter 11 bankruptcy is more complex than in Chapter 7 and may involve negotiating a payment plan or other arrangements with the IRS or other taxing authorities.

How does discharging your taxes in a chapter 11 bankruptcy work?

In Chapter 11 bankruptcy, a debtor can seek to discharge their taxes in a number of ways. One option is to negotiate a payment plan or other arrangement with the IRS or other taxing authority. This may involve offering to pay a portion of the taxes owed over time, or agreeing to other terms such as the sale of assets to pay off the taxes.

Another option is to propose a plan of reorganization that includes a provision for discharging taxes. This can be done in one of two ways:

1. Cramdown: Under a cramdown, the debtor proposes a plan that reduces the amount of the tax debt to the value of the collateral securing the debt. For example, if the debtor has a tax lien on real estate worth $100,000 and the tax debt is $200,000, the debtor could propose a plan that reduces the tax debt to $100,000 (the value of the collateral).
2. Subordination: Under subordination, the debtor proposes a plan that keeps the tax debt intact, but treats it as a lower priority claim than other debts. This means that the tax debt would be paid after other debts are paid.

It is important to note that the IRS and other taxing authorities have the right to object to a plan of reorganization that includes a provision for discharging taxes. If the objection is sustained, the taxes will not be discharged.

It is also important to note that the process for discharging taxes in Chapter 11 bankruptcy is complex and may involve negotiating with multiple taxing authorities. It is advisable to seek the advice of an experienced bankruptcy attorney if you are considering discharging taxes in Chapter 11 bankruptcy. Prominent Financial Consultants offers a range of services to help our clients succeed, and we would love the opportunity to discuss how we can help you. If you would like to schedule an appointment with us, please schedule a free 15 Minute Financial Clarity Call so that we can learn more about your needs and goals.