Bankruptcy can help an overburdened debtor wipe the slate clean and start over. Except for some debts, that is, which may be difficult or impossible to discharge via bankruptcy.
Personal bankruptcies have declined by nearly half from a recession-inflated peak of 1.5 million in 2010 to 770,000 in 2016, according to a count by the American Bankruptcy Institute. But while an improving economy has helped reduce the incidence of bankruptcy, one thing that hasn't changed is the difficulty of discharging some common kinds of debts.
Unlike Chapter 13 reorganization, in which debts are restructured with new payment plans and perhaps forgiving of some principal, Chapter 7 bankruptcies -- also known as liquidations -- are typically used to wipe debts away and give people a new start.
Money owed for taxes is one of the major types of debts bankruptcy contemplators bankruptcy are concerned about. "That's kind of the biggest question when people come in," says John Woodman, an attorney with Sodoma Law in Charlotte. Unfortunately, Woodman has to tell them that most federal tax debts cannot be wiped out by bankruptcy.
Jeff Sklarz, an attorney with Green & Sklarz in New Haven, Conn., says that's generally true of taxes a business owner deducts from employee paychecks, such as federal income tax and Social Security contributions. State sales taxes are also safe from erasure by bankruptcy.
Personal income taxes, however, may be erasable by bankruptcy subject to specific rules, Sklarz adds. For instance, the tax must have been due at least three years before the date of the bankruptcy petition. The debtor must have actually filed a tax return at least two years prior to seeking bankruptcy. And the debtor can't have filed an amended return or other new assessment of taxes owed for at least 240 days before seeking bankruptcy.