DISCHARGING TAXES IN BANKRUPTCY

As a genral rule, taxes are not dischargeable. Taxes include Income Tax, SalesTax, Self Employment Tax, and Social Security Tax. However, there are different kinds of tazes, and different rules that apply to the different kinds of taxes. (Property Taxes are a little different, because they are owed by your property, not by you individually. They are not dischargeable either in the sense that they remain a lien on your property until they are paid.) There are generally two categories of taxes: regular taxes, and "trust fund" taxes.

Like any rule, however, there are exceptions to the rule. Under the Bankruptcy Code, taxes can be dischargeable if they pass a two prong test: 1) The taxes must be for a tax year over three years old; and 2) you must have had your tax returns on file at least for two years. If you had an offer in compromise pending, it extends the time 240 days.

Trust fund taxes, like Sales Tax, Self Employment Taxes, or Social Security Taxes are never dischargeable. That means if you are self employed or a business owner, you need to pay your taxes first, because you can't discharge them in Bankruptcy, and they will keep accruing interest until the day you die. Maybe even after, to help pay for the bailout.

If you have non-dischargeable taxes, one of your options is to file Chapter 13 or Chapter 11 to work out a payment plan. Usually, however, experience has shown that if you are cooperative with the taxing authorities, you can work out a plan of repayment short of filing bankruptcy. Another alternative may be an offer in compromise.

In Bankruptcy, Taxes are classified as a "priority" claim. That means they get paid first before any unsecured creditor. In order to get a Chapter 13 or Chapter 11 Plan confirmed, one of the requirements is that you have to repay 100% of the nondischargeable taxes through the plan. That means that if your income is only sufficient to pay a portion of the taxes that is subject to discharge, you can still get a plan confirmed if your plan calls for the repayment of 100% of the taxes that are not subject to discharge.