There are certain circumstances where a debtor may be able to discharge their federal or state taxes partially or in full during. But taxes are usually treated as a priority debt during bankruptcy, what this means is that tax debts will be paid before certain other debts. For example, if a debtor owed federal taxes, the bankruptcy court would repay those federal taxes before the debtor’s mortgage or car note. However, there are times when tax debt is classified as non-priority debt. If a tax was incurred within the 3 years prior to the debtor filing for bankruptcy, then those taxes must be repaid 100 percent during the bankruptcy.
However, if the tax debts were incurred more than 3 years before filing for bankruptcy, the debts will be categorized as a non-priority debt. Under certain circumstances, a debtor may be able to discharge non-priority tax debt during bankruptcy. Sometimes bankruptcy courts will discharge non-priority tax debt during bankruptcy if the debtor simply is unable to repay the tax debt AND maintain reasonable living conditions.
For example, if a debtor is permanently disabled and experienced a significant drop in income the bankruptcy court may be willing to partially and even fully discharge tax debt in bankruptcy. However, if a debtor has failed to pay their taxes or has attempted to evade paying their taxes, the bankruptcy court may not discharge their tax debt in bankruptcy. And if the tax debt is classified as a priority debt, then the debtor is required to repay those taxes no matter what their circumstances are during the bankruptcy.