Attorney at Debt Advisors Law Offices
Practice Areas: Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, Stop Foreclosure
Filing for bankruptcy is a life-changing decision, and one of the most common concerns people have is how it will affect their taxes. From filing returns during bankruptcy to understanding whether tax debt can be erased, the rules are not always clear.
If you live in Wisconsin and are considering Chapter 7 or Chapter 13 bankruptcy, knowing the tax implications can help you make informed choices and avoid costly mistakes. Speaking with an experienced Wisconsin bankruptcy lawyer can also provide clarity about how federal and state rules may apply to your unique financial situation.
Many people are surprised to learn that while some tax debts can be discharged, others will stay with you even after bankruptcy. Refunds, audits, and IRS timelines all play a role in how bankruptcy and taxes connect. By the end of this guide, you’ll have a clearer understanding of what bankruptcy can and cannot do for your taxes and why careful planning makes all the difference.
Bankruptcy is written into the U.S. Constitution as a way to give individuals and businesses a fresh financial start. Over time, laws have been updated to balance the needs of taxpayers, creditors, and the government.
While bankruptcy can erase or restructure many types of debt, it does not automatically wipe out everything you owe to the IRS or the Wisconsin Department of Revenue.
The Internal Revenue Service (IRS) plays a key role in bankruptcy cases that involve tax debt. Certain types of taxes may qualify for discharge, while others remain your responsibility. Staying compliant with tax filing rules is essential, even when going through bankruptcy.
According to the IRS Bankruptcy Tax Guide (Publication 908), all debtors are still required to file returns and follow IRS procedures during the process.
Not all tax debts can be erased through bankruptcy. Some may qualify if specific conditions are met.
Older income taxes may be dischargeable if:
On the other hand, payroll taxes, recent income taxes, and debts tied to fraud or unfiled returns are nondischargeable.
“Under U.S. Bankruptcy Code § 523(a)(1), certain tax debts, including those related to fraud or unfiled returns, cannot be discharged.”
This means that while bankruptcy can help eliminate or reduce certain IRS debts, it is not a free pass for all tax obligations.
Chapter 7 bankruptcy, often called “liquidation bankruptcy,” allows individuals to discharge many unsecured debts. But tax obligations are treated differently.
If you file Chapter 7, you still need to submit your yearly tax returns. A trustee is appointed to review your finances and may use part of your tax refund to repay creditors. Only specific IRS debts that meet discharge conditions can be wiped out. Recent taxes, payroll taxes, and fraudulent returns will not be forgiven.
Refunds are a key concern. If you are owed a refund for a tax year before filing bankruptcy, that money may be considered part of your bankruptcy estate and used to pay debts. Refunds earned after filing typically remain yours, though exceptions exist.
Chapter 13 bankruptcy works differently. Instead of discharging debt quickly, it allows you to reorganize payments over a three- to five-year plan. Tax debts are often included in this repayment schedule.
You must continue filing returns during the plan. Failure to do so can result in dismissal of your case. One benefit is that IRS collection actions, such as wage garnishment or property liens, are usually halted during your repayment plan. This gives breathing room to manage debts more effectively.
While some tax penalties may still apply, Chapter 13 allows you to repay what you owe in smaller, manageable amounts. For many Wisconsin residents, this balance of protection and structure is a more realistic option than Chapter 7.
There are many myths about how taxes work with bankruptcy. Clearing up these misconceptions is important:
“Discharge of debt through bankruptcy is not considered taxable income under IRS rules.”
Bankruptcy does not erase every type of tax debt. It also does not excuse you from filing returns. Even if you are under bankruptcy protection, the IRS can still conduct an audit. While refunds may be delayed or applied to past-due taxes, they are not automatically taken away.
The belief that bankruptcy is a form of tax evasion is also false. It is a legal process meant to provide a second chance, not a loophole for avoiding federal or state tax responsibilities.
If you live in Wisconsin, you must continue to follow both federal and state tax laws during bankruptcy. Here are practical steps to stay on track:
Stay current with your tax filings. Even one missed return can complicate your case. Work with a qualified attorney who can explain how Wisconsin bankruptcy exemptions, such as homestead or wage protections, interact with your financial situation. An accountant or tax professional may also help ensure compliance with IRS rules.
Each city has unique economic challenges. For example, residents in Milwaukee may face high living costs, while those in Green Bay or Oshkosh may be affected by manufacturing changes. Debt Advisors Law Offices provides tailored guidance across multiple Wisconsin locations, helping individuals and families understand their rights and responsibilities.
|
Tax Type |
Can It Be Discharged in Bankruptcy? |
Notes/Exceptions |
| Income Taxes (older than 3 yrs) | Sometimes | Must meet timing rules, no fraud |
| Recent Income Taxes | No | Less than 3 yrs old |
| Payroll Taxes | No | Always nondischargeable |
| Fraudulent/Unfiled Returns | No | IRS exceptions apply |
| Tax Penalties (older) | Sometimes | Depends on underlying tax |
No. Only certain older income taxes may qualify, while recent, payroll, or fraud-related debts always remain.
Yes. Both Chapter 7 and Chapter 13 require you to continue filing your annual returns as usual.
It may. Refunds from before filing can go to creditors, while later refunds often stay with you.
No. Bankruptcy protection does not prevent or cancel an audit by the IRS.
Your bankruptcy case can be dismissed, and IRS penalties and interest may continue.
No. Bankruptcy is a legal tool to reset finances and manage debt responsibly.
Bankruptcy and taxes are closely connected, but the rules are specific. While certain older income taxes may be discharged, many tax obligations remain. Filing returns on time is always required, and refunds may be affected depending on timing. Chapter 7 and Chapter 13 treat taxes differently, so understanding the details is vital before making a decision.
For Wisconsin residents, the process may feel overwhelming, but support is available. With clear guidance, you can face financial challenges with confidence. Debt Advisors Law Offices is a debt relief agency committed to helping individuals and families across Wisconsin take the right steps toward a new beginning.
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.
