Tax debt can be overwhelming, especially when it reaches a point where the IRS is garnishing wages, levying bank accounts, or filing liens. For residents of Denver, CO, navigating tax debt can feel confusing and stressful, leading many to consider bankruptcy as a solution.
However, not all tax debt is dischargeable in bankruptcy, and there are important considerations to understand before taking this step. At Berken Cloyes, we guide clients through the complexities of tax debt and bankruptcy to help them make informed decisions.
Understanding IRS and Tax Debt
Tax debt occurs when individuals or businesses fail to pay federal or state taxes owed. Common causes include:
- Unpaid income taxes
- Penalties and interest from late payments
- Payroll taxes for business owners
- Disputes over deductions or underreported income
Unlike credit card debt or personal loans, tax debt has unique rules under federal law, making it essential to understand which types may be discharged in bankruptcy and which require alternative solutions.
What Bankruptcy Can and Cannot Do
Filing for bankruptcy can provide relief from certain types of debt, but tax debt is treated differently under the law. There are two primary types of consumer bankruptcy: Chapter 7 (liquidation) and Chapter 13 (repayment plan).
Chapter 7 Bankruptcy:
- Discharges certain federal income taxes, but only if strict conditions are met:
- The tax return was due at least three years ago
- The tax return was filed at least two years ago
- The taxes were assessed at least 240 days ago
- There was no fraud or willful tax evasion involved
Does not eliminate payroll taxes, recent income taxes, or certain penalties
Chapter 13 Bankruptcy:
- Can include a repayment plan to gradually pay back tax debt over three to five years
- Protects your wages, bank accounts, and property from immediate collection by the IRS
- May allow you to reduce penalties and interest while keeping up with payments
For Denver residents facing IRS collection actions, understanding the differences between Chapter 7 and Chapter 13 is critical to avoid mistakes that could lead to denied discharge or continued liability.
Immediate Protections Bankruptcy Provides
Even if tax debt isn’t fully dischargeable, filing bankruptcy triggers an automatic stay, which stops most collection activity immediately. This means:
- Wage garnishments are halted
- Bank levies are suspended
- Collection letters and phone calls must stop
- Foreclosure or repossession actions may be delayed
This protection gives taxpayers in Denver breathing room to evaluate their financial options without the stress of ongoing collection efforts.
Alternatives and Considerations Before Filing
Before filing bankruptcy for tax debt, it’s important to explore all available options:
- IRS Payment Plans – Installment agreements allow you to pay tax debt over time without filing bankruptcy.
- Offer in Compromise – In certain situations, the IRS may accept a reduced payment to settle your tax debt.
- Penalty Abatement – Some penalties can be reduced or removed if reasonable cause is demonstrated.
- Innocent Spouse Relief – If tax debt resulted from a spouse or partner, relief may be available under federal law.
Bankruptcy should be considered only after weighing these alternatives, as improper filing can result in denial of discharge for tax debt and continued liability.
Working with a Bankruptcy Attorney
Navigating tax debt and bankruptcy laws is complex. At Berken Cloyes, our experienced attorneys help Denver clients:
- Determine which tax debts are eligible for discharge
- Evaluate whether Chapter 7 or Chapter 13 is the right choice
- Prepare accurate and complete bankruptcy petitions
- Negotiate with the IRS to maximize relief and minimize penalties
By working with a knowledgeable team, taxpayers can avoid common pitfalls, protect their assets, and make informed decisions that provide real financial relief.
Key Takeaways
- Tax debt is not automatically dischargeable in bankruptcy, but under specific conditions, certain older tax liabilities may be eliminated.
- Filing for bankruptcy provides an automatic stay, offering immediate relief from IRS collection actions.
- Chapter 13 offers structured repayment plans, while Chapter 7 may discharge eligible older tax debt.
- Exploring alternatives like payment plans, offers in compromise, and penalty abatement is crucial before filing.
- Professional guidance ensures that Denver residents make informed choices and maximize relief.
Dealing with IRS or tax debt can be stressful, but understanding your options and working with experienced professionals can make a significant difference. Call us today at (303) 623-4357 to schedule a free case evaluation.
