Attorney at Debt Advisors Law Offices
Practice Areas: Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, Stop Foreclosure
For many people in Wisconsin, tax debt becomes the tipping point that leads them to explore bankruptcy. While credit card or medical debt is more commonly discussed, questions about whether tax obligations can be erased are often left unanswered. The reality is that bankruptcy law treats tax debt differently, with rules that depend on timing, type of tax, and the chapter filed.
If you’re considering options such as Chapter 7 bankruptcy in Wisconsin, this article will walk you through the key conditions, rules, and limitations so you can better understand what relief may be possible.
Bankruptcy is a legal process that allows individuals or businesses to manage debt through discharge or repayment. Tax debt is money owed to the IRS or state tax authorities. While both are financial burdens, tax debt is treated differently from credit cards or medical bills.
Not all taxes qualify for discharge. Payroll taxes, fraud penalties, and certain recent tax bills typically survive bankruptcy. Income tax debt, however, may be eligible under strict conditions.
Chapter 7, often called liquidation bankruptcy, can eliminate certain debts quickly. Tax debt under Chapter 7 is subject to clear rules:
If all these requirements are met, older income tax debt may be erased. But even then, complications exist, such as federal tax liens, which may continue despite a discharge.
Chapter 13 bankruptcy is built on repayment rather than liquidation. Instead of wiping out tax debt immediately, it allows a debtor to repay part of the balance through a three- to five-year plan. The amount repaid depends on income, expenses, and the type of tax owed.
At the end of the plan, some debts may be discharged, including eligible tax debts. This option benefits individuals who need structured repayment rather than immediate elimination. It also provides protection from IRS collection efforts during the repayment period.
Several rules determine whether tax debt qualifies for discharge. These rules are strict and must all be satisfied.
According to the IRS, unpaid income tax may be discharged if the return was due at least three years before the bankruptcy filing, filed at least two years before bankruptcy, and assessed at least 240 days before filing. Source: IRS.gov.
The income tax debt must relate to a return due at least three years before the bankruptcy case. For example, a return due April 15, 2020, becomes eligible in April 2023.
The IRS must have officially assessed the tax at least 240 days before the bankruptcy filing. If the taxpayer had an offer in compromise or a prior bankruptcy case, this timeline may extend.
If a tax return was filed late, it must have been filed at least two years before bankruptcy for the debt to be eligible.
Even when bankruptcy discharges personal liability, federal tax liens can remain on property. A lien is a government claim against assets such as a home, vehicle, or bank account.
If the lien was recorded before filing, the IRS may still enforce it after bankruptcy. This means a discharged debt does not erase the government’s claim on property.
In Wisconsin and other states, this distinction is especially important for homeowners. Filing bankruptcy may relieve personal debt, but selling or refinancing property could still trigger lien issues.
Tax debt and bankruptcy can become more complicated for married couples. In states with community property laws such as Wisconsin, filing by one spouse may affect jointly owned property. Couples must decide carefully whether to file jointly or separately.
Tax compliance also plays a role. Bankruptcy law requires accurate tax filings. Fraudulent returns or intentional evasion make tax debt nondischargeable. Filing on time and reporting income correctly is crucial for eligibility.
|
Rule/Requirement |
What It Means |
Applies To |
| Three-Year Rule | Tax debt must be at least 3 years old | Income tax debt |
| Two-Year Filing Rule | Return filed at least 2 years before bankruptcy | Filed returns |
| 240-Day Rule | IRS assessed debt 240+ days before filing | IRS-assessed taxes |
| Fraud/Non-Compliance | Fraudulent returns not dischargeable | All tax debts |
| Tax Liens | Liens may remain after bankruptcy | Property subject to liens |
No. Only qualifying income tax debts may be discharged. Payroll taxes, penalties, and fraud-related debts remain after bankruptcy proceedings.
Chapter 7 may erase older income tax debts. Chapter 13 usually requires partial repayment first, with possible discharge of remaining balances afterward.
The IRS must have assessed the tax debt at least 240 days before filing. Delays from prior cases or offers in compromise may extend this timeline.
Bankruptcy may discharge the debt but not the lien. Property with liens may still face claims if sold or refinanced after bankruptcy.
Yes. Spouses filing separately may protect one credit history, while joint filings address shared debts. Community property laws can impact outcomes.
Yes. Bankruptcy law requires that tax returns are filed, even if late, at least two years before filing for discharge eligibility.
Bankruptcy can sometimes wipe out tax debt, but only under strict conditions. Chapter 7 may eliminate older income tax debts, while Chapter 13 allows structured repayment. Federal tax liens often survive, and spousal or compliance factors can complicate cases.
The rules are complex, and every situation is different. If you are struggling with tax debt and wondering if bankruptcy is an option, professional guidance can help. Debt Advisors Law Offices has experience handling these issues and can provide clarity about how federal rules and Wisconsin laws may apply to you.
Learn about bankruptcy protections, types of bankruptcy, how to get started, what to expect, and who to trust. Filing bankruptcy is the ONLY way to completely eliminate debt. If bankruptcy is right for you, it offers powerful protections that cannot be achieved through alternative solutions such as hardship relief, loans, or debt settlement.
