I frequently have clients who owe back income taxes to the IRS or the Franchise Tax Board (FTB). When these clients mention the taxes they tell me that they understand that tax liabilities can’t be discharged in bankruptcy. While it is true that most tax debts are not dischargeable, there is a special carve-out in the Bankruptcy Code for cases filed under Chapter 7, 11, and 12, and Chapter 13 when the discharge is granted under 11 U.S.C. § 1328(b) (the so-called “Chapter 13 hardship discharge” that is sometimes available to debtors who have not completed the plan). As a convenient shorthand and a mild abuse of terminology, we’ll refer to this group of cases as the Chapter 7 case.
Things are slightly more generous if the debtor receives a Chapter 13 discharge under § 1328(a) after completing the Chapter 13 plan. Unsurprisingly, we’ll call this the Chapter 13 case. By the way, since all of the statutory references in this post are from the Bankruptcy Code, I’ll leave off the 11 U.S.C. and just give the section.
As you will see, timing is crucial. Even one day off and the debt is not dischargeable. Thus, as you read the post you will see how important pre-bankruptcy planning is in successfully discharging income tax debts.
Continue Reading Discharging Income Taxes: The Importance Of Pre-bankruptcy Planning