The Persistent Myth About Taxes and Bankruptcy

Many people believe that bankruptcy can’t write off any income taxes. Even attorneys sometimes perpetuate this myth.

Occasional Attorney Misinformation

The following dialog was found on a video of a bankruptcy attorney’s website showing the attorney being interviewed. In response to a question by the interviewer whether there were some debts that can’t be “touched” in a bankruptcy, the attorney responded:  

“Absolutely. Things like child support, alimony, uh, tax debts, student loans. Those generally aren’t dischargeable.”

The interviewer: 

“So the government’s gonna help you eliminate some of the debt in a bankruptcy. But not the debt to them.”

The attorney quipped:

“Not theirs, of course!”

Putting tax debts in the same category as child support and alimony—which indeed cannot ever be legally written off, or discharged—is wrong because income taxes CAN be discharged, as soon as they are old enough.

It is at the very least highly misleading for the attorney to say that tax debts “generally aren’t dischargeable” while including it with support debts that are never dischargeable, or student loans which are very rarely dischargeable.

Upcoming Answers about Taxes and Bankruptcy

Through the next few blog posts, you’ll learn what taxes can be discharged and what can’t. The fact is that bankruptcy can discharge taxes of many types and in many situations. Sometimes ALL of a taxpayer’s taxes can be discharged, or most of them. But there ARE significant limitations, which I will explain carefully.

Bankruptcy Can Help Deal with Taxes in Many Ways Beyond Potentially Writing Them Off

Besides the possibility that you will be able to discharge some or all of your taxes, bankruptcy can also:

1. Stop the tax authorities from garnishing your wages and bank accounts, and levying on (seizing) your personal and business assets.

2. Prevent them from gaining greater leverage against you, through tax liens and cumulating penalties and interest.

3. Avoid being forced to pay monthly payments directly to the tax authorities, with the monthly amounts dictated without sufficiently considering your other legal obligations and reasonable living expense.

Overall, bankruptcy gives you unique leverage against the IRS and/or your state/local tax authority. It gives you a lot more control over a very powerful class of creditors. Your tax problems are resolved not piecemeal but rather as part of your entire financial package. So you don’t find yourself focusing on your taxes while worrying about the rest of your creditors.