Filing for Bankruptcy: What You Should Know Before Paying Your Taxes

Tax season can be stressful—especially if you’re already struggling with debt. Many people don’t realize that certain tax obligations can be affected by bankruptcy, or that timing your bankruptcy filing around tax deadlines can have a significant impact on both your financial liabilities and legal protections. JPP Law helps individuals and families navigate these complex rules and make informed decisions. Below, we outline key considerations you should keep in mind about bankruptcy before writing that check to the IRS or state tax authority.

Why Bankruptcy Timing Matters During Tax Season

If you’re thinking about filing for bankruptcy, the date you file can influence how your tax debts are treated. In some circumstances, filing too early could mean more of your tax debt remains classified as priority (and non-dischargeable). On the other hand, waiting too long might allow penalties and interest to accumulate, or even permit the IRS or state authority to place liens on your assets. Understanding these timing nuances can help you minimize what you owe or consolidate your tax debt under a manageable repayment plan

Bankruptcy and Tax Debt Eligibility

Some types of tax debt can be discharged (eliminated) in bankruptcy—usually income taxes—provided they meet specific legal criteria. Generally, the tax debt must be at least three years old, the returns must have been filed on time (or filed late but still within a specific window), and the tax must have been assessed by the IRS at least 240 days prior to your bankruptcy filing. Failing to meet just one of these requirements could keep that tax debt from being discharged. A thorough review with a bankruptcy attorney in Wilkes Barre will clarify whether your particular tax obligations might be dischargeable or subject to repayment under Chapter 13.

Federal vs. State Tax Obligations

When most people think about taxes, federal income tax comes to mind first. However, state tax debts—including personal income tax, property tax, or sales tax for small-business owners—can also factor into your bankruptcy plan. Each state has unique rules about how and when taxes are assessed. If you live in Pennsylvania, working with an attorney well-versed in both state and federal regulations helps ensure you don’t overlook any opportunities for relief.

Chapter 7 vs. Chapter 13 Considerations

• Chapter 7: Often referred to as “liquidation bankruptcy,” Chapter 7 Bankruptcy may allow you to eliminate certain older federal and state income tax debts, but only if all timing requirements are satisfied. If your tax debt does not meet the rules for discharge, you’ll likely still owe it after your case concludes.

   

• Chapter 13: In a Chapter 13 Bankruptcy plan, you can spread out tax arrears and other debts over three to five years. This approach often grants more flexibility in addressing tax obligations—especially if they’re deemed priority debts that can’t be discharged but can be repaid at a manageable monthly rate.
  

The Automatic Stay and Tax Collections

Once you file for bankruptcy—whether Chapter 7 or Chapter 13—the automatic stay goes into effect, generally halting most collection actions. This means the IRS and other taxing authorities must stop wage garnishments, levies, or active collection measures. While the automatic stay doesn’t automatically eliminate your tax debt, it can provide much-needed breathing room to work out a repayment strategy or confirm which obligations can be discharge

Tax Refunds and Bankruptcy

Another key factor during tax season is what happens to your tax refund. In some Chapter 7 cases, the bankruptcy trustee may claim part or all of your refund to pay creditors—especially if you’re owed a substantial amount. Under Chapter 13, you might need to factor refunds into your repayment plan. With proper planning and by leveraging available exemptions, you may be able to preserve some or all of your refund, but this is something a bankruptcy lawyer in Wilkes Barre can help you evaluate based on local and federal exemption rules.

Getting Professional Guidance

Dealing with debt is stressful on its own; adding tax obligations into the mix can feel overwhelming. Yet, with the right guidance, you can emerge from this situation with a clearer path toward financial stability. Our legal team focuses on:

• Evaluating your tax debts for potential discharge or reorganization

   

• Timing your bankruptcy filing strategically around tax deadlines

   

• Negotiating with the IRS or state authorities to halt aggressive collection actions

   

• Maximizing exemptions to protect your tax refund and other property

   

• Ensuring your bankruptcy paperwork is accurate and complete for the best possible outcome

   

Ready to Explore Your Options?

If you’re wrestling with how to handle taxes while also considering bankruptcy, we’re here to help. By analyzing your debts, income, and recent tax filings, JPP Law can provide personalized strategies for either eliminating or restructuring those obligations. Contact us today to schedule a consultation with a dedicated bankruptcy attorney in Wilkes Barre. We’ll help you determine the best timing and approach for resolving your tax liabilities, so you can move forward with confidence and peace of mind. Get in touch with us today, and start living your life again!