Filing for Chapter 7 bankruptcy can offer a fresh financial start—but what happens to your taxes? Understanding how tax debts are treated under Chapter 7 is crucial for anyone considering this form of relief.

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Can Tax Debt Be Discharged in Chapter 7?

Yes—but only under specific conditions. Most tax debts are not automatically wiped out in bankruptcy. However, some federal and state income tax debts may be discharged if they meet all of the following criteria:

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The “3-2-240” Rule:

1. The 3-Year Rule: The tax return was due at least three years before the bankruptcy filing.

2. The 2-Year Rule: You filed the tax return at least two years before filing for bankruptcy.

3. The 240-Day Rule: The IRS assessed the tax at least 240 days before your bankruptcy was filed.

Additionally:

• The tax return must not be fraudulent.

• You must not have willfully attempted to evade paying the taxes.

If all these conditions are met, your qualifying income tax debt may be discharged through Chapter 7.

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Tax Debts That Cannot Be Discharged

Some types of tax obligations are generally not dischargeable, including:

• Payroll taxes (trust fund taxes)

• Tax penalties for fraud

• Recent tax debts (within 3 years)

• Unfiled tax returns

• Property taxes assessed within the last year

These debts will survive your Chapter 7 filing and remain your responsibility.

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What Happens to Tax Refunds?

Your tax refunds may be considered part of your bankruptcy estate, especially if they are from income earned before your filing date. The trustee may:

• Seize the refund to pay creditors

• Allow you to keep it, depending on exemptions and your state laws

Planning ahead with your attorney can help you understand what to expect.

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Will Bankruptcy Stop IRS Collections?

Yes. Once you file for Chapter 7, an automatic stay goes into effect. This legal protection:

• Stops IRS wage garnishments

• Halts tax lien filings (temporarily)

• Pauses collection calls and letters

However, if a tax lien was already placed on your property before filing, bankruptcy may not remove it—even if the underlying debt is discharged.

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What Should You Do Before Filing?

If you have significant tax debt, it’s important to:

1. Gather your tax records – including returns, assessments, and notices from the IRS or your state’s tax agency.

2. File all past-due returns – even if you can’t pay the taxes, filing is essential for discharge eligibility.

3. Speak with a bankruptcy attorney – they can help determine if your tax debts qualify and how to structure your case.