The Most Common Tax

• Markus says the most common tax debt involved in bankruptcy cases involves federal or state income tax. These taxes can be considered either secured or unsecured debt, depending upon which chapter a debtor files under. Chapter 13 involves partial repayment of debt, while Chapter 7 requires no repayment of debt, but can result in liquidation of some assets.
  
  

Priority Taxes

• Priority taxes are typically debts owed for returns filed three years before the bankruptcy filing. A priority tax debt can also be assessed within 240 days prior to the bankruptcy filing. Priority taxes cannot be discharged in any bankruptcy case.
  
  

Help with Repayment

• The Internal Revenue Service (IRS) is the most typical creditor for priority tax debts. While that money must be repaid, San Antonio attorney Rick Flume says the bankruptcy code can still help. Filing for bankruptcy can immediately stop garnishment of wages for the purpose of paying back taxes. A Chapter 13 plan can also help a debtor spread out IRS back tax payments over 60 months.
  
  

Wiping it All Out

• Several ways exist to discharge the tax without repayment: the debtor must prove she did not file a fraudulent return to willfully evade the tax; the tax debt must be at least three years old; and the returns had to be timely filed and two years before the bankruptcy case was filed, according to etaxes.com. These requirements became law in the 2005 Bush Administration bankruptcy code reform.
  
  

No Help for Liens

• Even if your taxes qualify for discharge in a Chapter 7, you still may owe the federal government. A Chapter 7 discharge would wipe out your personal obligation to pay the debt and prevent wage garnishment, but the lien will remain if the IRS started a lien on your property to pay the tax debt before you filed for bankruptcy.