Does bankruptcy clear tax debt? The short answer in 2025 is yes — but only for certain older income tax debts that meet strict IRS and bankruptcy code requirements. Recent inflation adjustments effective April 1, 2025 raised filing thresholds by about 13.2%, giving more Americans access to relief while the core rules for discharging tax debt remain unchanged.
Millions of taxpayers owe the IRS right now, and back taxes continue to grow for many households. Bankruptcy can erase qualifying income tax obligations completely, along with related penalties and interest, yet most other types of tax debt survive the process untouched. Understanding exactly what can and cannot be wiped out is the difference between real relief and wasted time.
How Tax Debt Is Treated in Bankruptcy
Tax debt is treated differently from credit cards or medical bills. Only specific federal and state income taxes can ever be discharged. Payroll taxes, sales taxes, trust fund taxes, and recent income taxes are almost always excluded.
The Bankruptcy Code contains precise exceptions written by Congress to protect government revenue while still offering a fresh start to honest taxpayers. These rules have stayed remarkably consistent through 2024 and 2025, with no major legislative overhauls.
The 3-2-240 Rule Explained
The single most important test is the 3-2-240 Rule. All three timing requirements must be satisfied for an income tax debt to qualify for discharge:
- Three-Year Rule – The tax return was due (including extensions) at least three years before you file bankruptcy.
- Two-Year Rule – You actually filed the return at least two years before filing bankruptcy.
- 240-Day Rule – The IRS assessed the tax at least 240 days before your bankruptcy petition.
Meet every part of the test and the debt disappears. Miss even one requirement and the full balance, plus penalties and interest, survives bankruptcy.
| Requirement | What It Means | Example for December 2025 Filing |
|---|---|---|
| 3-Year Rule | Return due ≥ 3 years ago | 2021 return (due April 2022) qualifies |
| 2-Year Rule | Return filed ≥ 2 years ago | Filed by December 2023 qualifies |
| 240-Day Rule | IRS assessment ≥ 240 days ago | Assessed by April 2025 qualifies |
Which Tax Debts Can Actually Be Discharged
Only income taxes qualify when the 3-2-240 Rule is satisfied. Associated penalties and interest on those same taxes are discharged too.
Non-dischargeable taxes include:
- Payroll and trust fund taxes
- Sales taxes collected from customers
- Recent income taxes that fail any part of the 3-2-240 test
- Taxes tied to fraud or willful evasion
- Most excise taxes
State income taxes generally follow the same federal guidelines, though a handful of states have minor variations.
Chapter 7 vs. Chapter 13 for Tax Debt
Chapter 7 offers the fastest path. Eligible tax debts are wiped out completely in four to six months with no repayment plan required. The automatic stay stops IRS levies and garnishments the moment you file.
Chapter 13 works differently. You pay priority tax debts in full through a three- to five-year plan while old dischargeable taxes are treated as unsecured debt and often paid only pennies on the dollar. Any remaining balance is discharged at the end.
Higher debt limits that took effect in 2025 now allow more people with large tax burdens to use Chapter 13 without exceeding the caps.
Key 2025 Updates That Affect Tax Cases
April 2025 brought inflation-based increases:
- Unsecured debt limit rose to $465,275
- Secured debt limit increased to $1.395 million
- Family income thresholds for the means test went up across all states
These changes make filing easier for middle- and higher-income households carrying significant tax debt.
Common Mistakes That Prevent Tax Discharge
- Filing bankruptcy too soon before the 3-2-240 clocks expire
- Failing to file a required return (even late) at least two years before petition
- Missing current-year tax filings during the case
- Attempting to discharge fraud penalties or trust fund taxes
Avoid these errors and your chances of success rise dramatically.
Steps to Take Right Now
- Pull all tax transcripts from the IRS website
- Confirm exact due dates, filing dates, and assessment dates
- Run your debts through the 3-2-240 test
- Meet with a bankruptcy attorney experienced in tax discharge cases
- Continue filing and paying current taxes on time
Timing is everything. Waiting a few extra months can turn a non-dischargeable debt into one that vanishes forever.
Life After Tax Debt Discharge
Credit scores begin recovering within months. The bankruptcy stays on reports for seven to ten years, but new credit becomes available much sooner. Most people see meaningful score increases within two years of discharge.
The relief is immediate — wage garnishments stop, bank levies end, and the constant stress of IRS collection lifts overnight.
FAQ: Does Bankruptcy Clear Tax Debt?
Can all income tax debt be discharged in bankruptcy? No. Only debts that satisfy the full 3-2-240 Rule qualify.
Do penalties and interest go away too? Yes, when the underlying income tax is dischargeable.
What about payroll or trust fund taxes? Never dischargeable, regardless of age.
Does Chapter 7 or Chapter 13 work better for tax debt? Chapter 7 is faster and cleaner for purely dischargeable taxes. Chapter 13 protects assets and handles priority taxes.
Will the IRS keep garnishing wages after I file? No. The automatic stay stops all collection activity immediately.
Are state income taxes treated the same way? Generally yes, though you should confirm with local rules.
What if I still owe taxes for the current year? You must stay current on post-filing returns and payments or risk case dismissal.
Bold call-to-action: What part of your tax situation feels heaviest right now? Share in the comments — you’re not alone, and real answers are here.