Most California residents automatically assume that their tax debts are not dischargeable in bankruptcy. However, in certain circumstances, tax debts can actually be discharged. Usually, though, it is only in Chapter 7 proceedings that federal tax debt is included in the bankruptcy.
In Chapter 13 bankruptcy proceedings, debtors create a repayment plan that is approved by the court. During the course of that payment plan, the debtor makes regular monthly payments lasting for a three- to five-year period and tax debts (among other debts) are brought together to be paid off in the Chapter 13 process. Conversely, with Chapter 7, debtors are able to dissolve specific kinds of debt -- usually medical bills, credit cards and more -- and sometimes that debt can include federal tax-related bills.
In addition to tax debt, penalties related to taxes might also be dischargeable in some circumstances. Once the debt is discharged, wages cannot be garnished and the borrower will be free of the responsibility to pay the discharged tax bills.
In order to determine whether a specific tax debt is dischargeable, a bankruptcy lawyer will need to look at the age of the debt, the type of taxes involved and whether the borrower submitted tax returns. Once it is determined that the tax debt is potentially dischargeable, the attorney can then select appropriate strategies to include in the bankruptcy proceedings. It should be stressed that this is not an area of the law that borrowers will want to take any kind of risk in as tax and/or bankruptcy mistakes can result in serious lawsuits and even criminal consequences, fines and stiff punishments.
Source: FindLaw, "Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy," accessed June 09, 2016