The most common use of bankruptcy is that, which people who are not able to pay their debts to commercial organizations embark on. However, a good number of people are oblivious of the fact that bankruptcy can also be used to resolve debt when government organisations are involved.  There is bankruptcy intended for a tax debt.

The major agency that represents the United States government in matters relating to tax is the Internal Revenue Service (IRS). A lot of people dread this revenue arm of the U.S government, especially when they are not able to meet up with their tax liabilities. Well, the truth is that the IRS is not there to scare you as a taxpayer, but to help you meet up with your tax obligations to the government. This is why it is important to contact them as soon as you realize that you cannot meet with your tax liabilities rather than waiting until they come after you.

However, if you realize that you are not able to cover your tax liabilities; one possible option at your disposal is to file for bankruptcy on your tax debt. Two possible chapters that can be applied in the case of filing for tax debt bankruptcy are chapters 13 and 7; the former is known as a reorganization bankruptcy which fundamentally grants you a period of three to five years to properly arrange your financial affairs, and paying back a lowered amount of outstanding tax debt during the period.


Generally, any tax outstanding will attract interest payment penalties. You should also know that the tax payment will not be lowered if the Internal Revenue Service has already served a tax lien prior to your bankruptcy; the reason is that a tax lien becomes a secured debt.

The chapter 7  used for bankruptcy intended for a tax debt is known as a liquidation bankruptcy and is applicable for tax debt that is above three years old. Your tax debt will be lifted when you file a chapter 7 only if the IRS has not issued a tax lien on the taxpayer before filing chapter 7. But if the IRS have already issued a tax lien, then the taxpayer’s debt is held, pending when the taxpayer goes off from chapter 7, then it will become payable. It is necessary for the taxpayer to schedule the financial obligation post chapter 7, before getting off from bankruptcy.

A number of people have gone after a different way by paying an application of fee of $150 to the Internal Revenue Service and lodging a Form 656; Offer in Compromise. This option (the Offer in Compromise) brings the taxpayer and the IRS into an agreement that the taxpayer will only pay a small percentage of the tax outstanding. OIC is solely at the discretion of the IRS and the taxpayer will need to provide much financial information to the IRS, of which most taxpayers may not want to divulge such information to the IRS. The option of using Offer in Compromise for tax debt settlement requires a consultation with a tax expert to be able to negotiate favourably.