Many New Jersey residents struggling with overwhelming tax debt wonder if bankruptcy can provide relief. While most tax debts cannot be erased through bankruptcy, certain types may be dischargeable under specific conditions. Understanding how bankruptcy interacts with tax obligations can help you determine the best path toward financial stability.

When Tax Debt Can Be Discharged

You may be able to discharge federal or state income tax debt in New Jersey if all of the following conditions are met:

1. The tax debt is at least three years old. The taxes must have been due at least three years before you filed for bankruptcy.
2. You filed the tax return at least two years before filing for bankruptcy. Late-filed returns may not qualify.
3. The tax was assessed at least 240 days before filing. The IRS or New Jersey Division of Taxation must have finalized the tax amount more than 240 days before your bankruptcy filing.
4. No fraud or willful evasion. If you filed a fraudulent return or intentionally avoided paying taxes, the debt will not be discharged.

Types of Bankruptcy and Tax Debt

• Chapter 7 Bankruptcy: If your tax debt qualifies under the above rules, it may be fully discharged along with other unsecured debts like credit cards or medical bills.
• Chapter 13 Bankruptcy: While some tax debts might not be dischargeable, Chapter 13 can help you reorganize and pay them off through a three- to five-year repayment plan, often with reduced penalties or interest.

What Taxes Cannot Be Discharged

Certain tax obligations remain after bankruptcy, including payroll taxes, property taxes, and taxes from unfiled or fraudulent returns. However, bankruptcy can still provide relief by eliminating other debts, freeing up funds to manage remaining tax obligations.

If you’re facing significant tax debt in New Jersey, Carroll Law Firm, P.C. can review your financial situation and determine whether bankruptcy could help you achieve a fresh start.