Generally, bankruptcy is a last resort process that provides relief to taxpayers who are unable to alleviate their liability through any other method. Many types of income taxes, subject to severe constraints, are dischargeable in bankruptcy. There are two basic types of bankruptcy available:

1. Chapter 7 Bankruptcy is a liquidation, or straight bankruptcy, that allows taxpayers to wipe out their obligations (if they are not non-dischargeable). The majority of Chapter 7 Bankruptcy cases are “no-asset” cases because the debtors are able to protect their assets. However, if non-exempt assets exist, a Chapter 7 Bankruptcy will result in non-exempt assets being liquidated for the benefit of the IRS or other creditors.
2. Chapter 13 Bankruptcy is a reorganization whereby taxpayers can restructure their debts and protect their assets. Often, debtors use Chapter 13 Bankruptcy to save their homes from foreclosure and their cars from repossession. Chapter 13 repayment plans are typically 3 to 5 years. Often a Chapter 13 Bankruptcy will stop interest and penalties from accruing throughout the repayment period.

In order for a tax liability to qualify for discharge under Chapter 7 of the Bankruptcy code, all of the following criteria must be met:

1. Tax is for a year for which a tax return is due more than 3 years prior to the bankruptcy filing;
2. Tax returns were filed more than two years prior to the bankruptcy filing;
3. The tax liability was assessed more than 240 days prior to filing of the bankruptcy petition;
4. The liability is not due on Trust Fund Tax;
5. The taxpayer did not attempt to evade or defeat the tax, nor was the tax liability due to a fraudulent tax return;
6. The tax was not assessable at the time of the filing of the bankruptcy petition; and
7. The tax was unsecured.