By eliminating the “super discharge” in bankruptcy, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) significantly changed how taxes are discharged in bankruptcy. Why was the end of the super discharge important to bankruptcy petitioners?

Prior to 2005, the super discharge allowed individual Chapter 13 petitioners to discharge taxes even when the debtor failed to file tax returns, filed late tax returns, or filed fraudulent tax returns. Needless to say, this arrangement did not go over well with the federal government; Congress took action by eliminating the super discharge altogether with the BAPCPA. Since 2005, all individual debtors face the same tax discharge hurdles, whether they file Chapter 7, Chapter 11, or Chapter 13.

In 2012, long after BAPCPA went into effect, consumer debtors are still confused by tax discharge provisions in Chapter 7 (straight liquidation), Chapter 11 (reorganization), and Chapter 13 (individual repayment plan). This article will shed some light on what is possible regarding the discharge of taxes in bankruptcy. And when I say discharge, I mean wiped out in a Chapter 7 bankruptcy.

Rule of Five: When Are Taxes Dischargeable in Chapter 7?

We start with the general rule that taxes are not dischargeable in bankruptcy, but there is a huge exception to that rule. Taxes are dischargeable in a Chapter 7 bankruptcy when the individual debtor jumps through the requisite hoops. To determine tax dischargeability, the following five rules must be satisfied...