When a Texas resident files for bankruptcy, tax debts could be discharged along with any other outstanding balances. However, it is not a given that a tax debt will be eliminated. If that debt is related to withholding taxes owed, it generally won't go away in either a Chapter 7 or Chapter 13 case. The same is true if a person is trying to use the bankruptcy system in an effort to evade a tax bill.
Tax liabilities associated with fraudulent or frivolous tax returns will also not be eligible for discharge in bankruptcy. To qualify for a potential discharge, the taxes owed must be assessed 240 or more days prior to a person filing for protection. The debt must also be at least three years old at the time of a bankruptcy filing and associated with a return that was filed two or more years prior to the filing.
The priority a debt is given can determine whether it will go away in a bankruptcy case. The type of debt could also make a difference in how it is treated. For instance, business or personal property taxes might be treated differently than income taxes. As both tax cases and bankruptcy cases can be complicated, it can be difficult to predict the outcome of a given case ahead of time.
By filing for Chapter 13 bankruptcy, a person may be able to reorganize a tax debt and pay it off over three or five years. Unsecured debt balances may also be included in an overall repayment plan, and eligible debts could be discharged if they are not paid off in full after the repayment period. A lawyer could help a debtor through the filing process.