How does Chapter 7 eliminate IRS tax?

IRS tax debts that qualify under Chapter 7 are discharged (eliminated). And other unsecured debt, such as state income tax, non-trust fund employment taxes, credit card debt, medical debt, and bank loans are also discharged. Home loans and car loans can be “reaffirmed” so that the loans survive bankruptcy and are paid according to the contract, or you can choose to “surrender” the property, pay nothing, and walk away.  

Now, one of the little known benefits for folks IRS tax debt is that they may more easily qualify for Chapter 7 than other folks. You see, usually to qualify for Chapter 7, you must qualify under a “means test” that compares income to reasonable expenses and determines whether you qualify for Chapter 7. In simple terms, if you make too much money according to the means test, you can’t file Chapter 7.

The good news is that enough tax liability owed to the IRS may allow you to bypass the means test requirement because that requirement applies only to people with substantial “consumer debts” like credit card debt or residential mortgage debt. IRS taxes as well as business debt are not considered consumer debts. Therefore, if over half of your debt is non-consumer debt, like tax debt or business debt, the means test does not apply to you.

Filing Chapter 7 instantly stops tax levies and other IRS collection. It also stops – permanently or temporarily – lawsuits, garnishments, foreclosure, and collection action. Chapter 7 lasts three to four months. There is usually no court appearance required, and you will meet with your attorney and trustee at a 341 hearing that lasts about ten minutes, where you will be asked very basic questions about your financial situation.  

99% of my clients keep 100% of their property in Chapter 7. That’s because equity in personal property, real estate, and investments are protected by exemptions. For those who with excess equity, Chapter 13 is an alternative, as explained below.

It may be wise to get a free copy of the Faith Firm book, How to Get Tax Forgiveness. It will shed some more light on solving tough tax problems using bankruptcy and other proven tax strategies.

Get a free copy of the Faith Firm book, How to Get Tax Forgiveness. It will shed some more light on bankruptcy and solving tough tax problems.