The answer is like most answers to tax questions…… Well, it depends. There are now two prevalent types of bankruptcy. Chapter 7 is a liquidation process established for non-consumer debt. The Chapter 13 bankruptcy is a consumer debt reorganization.
Tax debt can sometimes be discharged under a Chapter 7 bankruptcy. There are several cri-teria the debtor would need to meet. One criteria is that there has not yet been a lien filed by the IRS. If this is the case, old taxes can be discharged as nonpriority general unsecured debts – just like a credit card. If there is a lien, the lien remains and must be paid when the debtor sells property.
Tax debt can sometimes be reduced under a Chapter 13 bankruptcy. The Chapter 13 usually allows the debtor to settle debt for pennies on the dollar. All existing debts must be paid off within 5 years. Under Ch. 13, liens can be “valued” to the debtor’s equity in property at the time of the filing.
Bankruptcies can be very complicated, and anyone considering this should get qualified legal advice. The rules would depend a great deal on one’s particular situation.