Does Bankruptcy Clear Tax Debt?

If you’re drowning in tax bills, you are probably looking for a way out of the situation. Tax debt can feel heavy because it is not just a credit card company or medical provider you owe; it is the government.

Many Maryland residents facing financial hardship might wonder whether bankruptcy can wipe out tax debt.

Well, the answer is not so simple. Here is a look at whether you could qualify for the discharge of these heavy debts.

What to Know About Bankruptcy in Maryland

Bankruptcy is designed to give people a financial fresh start. You may file for Chapter 7 or Chapter 13, depending on your situation.

Chapter 7 bankruptcy is called “liquidation bankruptcy.” This process can wipe out many types of unsecured debt quickly. The other option is Chapter 13 bankruptcy. As part of this process, you have a repayment plan that gives you the chance to reorganize debts over 3 to 5 years.

Many people assume bankruptcy clears every type of debt. Unfortunately, tax debt does not fall neatly into that category. The government plays by its own rules, and only certain tax debts can be discharged.

What Types of Tax Debt Can Be Discharged?

Bankruptcy can only erase income tax debt under very specific conditions. Other types of taxes, like payroll taxes or penalties for fraud, are off the table.

If you want to qualify for discharge, your tax debt must meet all of the following requirements:

• It must be income tax: Payroll taxes, trust fund taxes, and penalties for fraudulent returns cannot be discharged.
• The tax return must have been due at least three years before filing: For example, if you file for bankruptcy in 2025, the return for tax year 2021 could potentially qualify.
• You must have filed the return at least two years before filing for bankruptcy: Late-filed returns usually do not count.
• The tax must have been assessed at least 240 days before you file: This “assessment date” is when the IRS or Maryland Comptroller officially recorded the debt.
• No fraud or willful evasion: If the government believes you intentionally hid income or misrepresented your tax situation, bankruptcy won’t help.

If your tax debt checks all these boxes, it might be eligible for discharge.

What About Tax Liens?

Even if the underlying tax debt qualifies for discharge, liens are another issue.

If the IRS or the Maryland Comptroller placed a lien on your property before you filed bankruptcy, the lien does not disappear.

Bankruptcy may clear your personal obligation to pay the debt, but the lien still sticks to your property. That means if you sell your home, the lien will need to be paid before you see any proceeds.

While bankruptcy can help, it does not always wipe the slate completely clean.

How Chapter 7 vs. Chapter 13 Handles Tax Debt

How bankruptcy interacts with tax debt also depends on which chapter you file.

• In Chapter 7, qualifying income tax debt that meets the timing and filing rules may be completely erased. However, you may still be responsible if the debt does not qualify or a lien is involved.
• In Chapter 13, tax debts that do not meet the strict discharge rules can sometimes be included in your repayment plan.

You will pay what you can afford over 3 to 5 years, and at the end of the plan, remaining eligible debts may be wiped out. Many people choose Chapter 13 because it provides breathing room and prevents aggressive IRS collection actions while they repay what they owe.

Steps to Take if You’re Considering Bankruptcy for Tax Debt

If you’re staring down tax bills and wondering if bankruptcy might be the answer, here’s a roadmap to help you move forward:

• Gather your tax records: You want to collect copies of your filed returns, IRS or Maryland Comptroller notices, and any payment history. Knowing exactly what you owe and when makes it easier to determine if your debt meets the discharge rules.
• Check the timelines: Remember the “3-2-240” rule: the return must be due at least 3 years ago, filed at least 2 years ago, and assessed at least 240 days ago. If your debt doesn’t fit these windows, it may not qualify for discharge in Chapter 7.
• Consider Chapter 13 as an alternative: Even if your tax debt is too recent to wipe out, Chapter 13 can still give you structured breathing room to repay overtime without the pressure of aggressive collection.
• Talk to a professional: Tax debt and bankruptcy law are full of technical traps. A Maryland bankruptcy attorney can look at your records, explain whether your debt qualifies, and help you weigh your options between Chapter 7 and Chapter 13.

Taking these steps puts you back in control. Even if bankruptcy isn’t the right solution today, you can have a clear picture of where you stand, and that’s the first step toward financial peace of mind.

Get Answers to Your Bankruptcy Questions

Facing tax debt is stressful, and the thought of the IRS or Maryland Comptroller breathing down your neck is enough to keep anyone awake at night. Bankruptcy is not a magic wand, but it can provide relief and a path forward in the right circumstances.

You have options if you’re dealing with overwhelming tax debt in Maryland. Talking to a skilled bankruptcy attorney can help you figure out the best path. Sometimes, that may include wiping out old tax debt through bankruptcy or restructuring payments in a way that gives you breathing room.

At Belsky & Horowitz, LLC, we are here to discuss these options with you.