Taxes and
Bankruptcy
Taxes and Bankruptcy
Last updated August 9, 2026
Owing significant tax debt can create constant financial pressure. Many individuals and business owners in Dallas believe income taxes can never be eliminated through bankruptcy. In reality, certain income tax debts may qualify for discharge if specific legal requirements are met.
Bankruptcy and tax law overlap in complex ways. Determining whether your tax debt can be discharged requires reviewing the type of tax owed, when the return was filed, when the IRS assessed the balance, and whether any fraud is involved. Not all taxes qualify. Payroll taxes, recent assessments, and penalties tied to fraud generally cannot be eliminated.
If you are considering bankruptcy because of tax debt, a detailed evaluation is critical before filing.
Can Income Taxes Be Discharged?
Some income tax liabilities may be discharged in bankruptcy if they meet strict timing rules. In general:
- The tax must be income tax.
- The return must have been properly filed.
- The debt must meet minimum age requirements.
- The IRS must have assessed the tax within certain time limits.
- There can be no willful tax evasion.
Older income tax debts are more likely to qualify than recent ones. Filing too early could result in the debt surviving the bankruptcy. Reviewing IRS transcripts before taking action helps show whether you are eligible.
How Bankruptcy Stops IRS Collection
When a bankruptcy case is filed, an automatic stay goes into effect right away. This legal protection can stop most IRS collection actions. Those actions include the following:
- Wage garnishments
- Bank levies
- Active collection efforts
- Property seizures
This relief can provide immediate breathing room while a long-term solution is structured.
Chapter 7 vs. Chapter 13
The type of bankruptcy filed affects how tax debt is treated.
Chapter 7 may allow qualifying income tax debts to be permanently discharged. It is often appropriate for people with limited disposable income and significant unsecured debt.
Chapter 13 creates a repayment plan that runs three to five years. Not all tax debt may be eliminated, but this option can stop collection actions and allow structured payments over time. It can also help protect assets while resolving priority tax obligations.
Choosing the correct chapter requires a full financial analysis.
Alternatives to Bankruptcy
Bankruptcy is not always the best solution. Depending on your situation, other tax resolution options may be more effective. These include:
- IRS installment agreements
- Penalty abatement
- Offer in Compromise
- Currently Not Collectible status
A careful review ensures you pursue the strategy that minimizes long-term financial consequences.
Protecting Your Financial Future
In bankruptcy cases, tax authorities are considered priority creditors. The rules governing discharge are technical. Filing without proper analysis can result in lost eligibility or continued liability.
Our team has over 10 years of experience and has assisted more than 450 clients. We evaluate each case carefully to determine the most effective path forward.
If tax debt is pushing you toward bankruptcy, call (469) 626-7760 to schedule a confidential consultation and explore your options.
TESTIMONIALS
“ Andrew Margolies did a great job for my mom who had paid her taxes, but the IRS failed to associate the payment with her account. She kept getting letters demanding payment with accrued interest and fees even though they had cashed her check.
After Andrew started working on it, the letters stopped. We were notified there had been a credit to my mom’s account, and finally the payment was properly applied with a zero balance. She is even receiving a refund.
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T B.
“I came to Andrew Margolies with a significant IRS issue that I had been losing sleep over for months. I spoke with Jennifer on the phone, got in the same day for a consultation, and had a full resolution within 2 business days for a reasonable price. Andrew did exactly what he said he was going to do and provided me with a thorough resolution.
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C S.
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Attorney Andrew is very knowledgeable with reasonable fees and Jennifer is very responsive to all requests and questions. Most importantly they have business ethics. I will not look further if I have any more tax problems.”