When IRS collection letters pile up and wage garnishments threaten your paycheck, bankruptcy might seem like your only way out. But before you file, you need to understand both the benefits and risks of using bankruptcy to stop IRS collections in New York.
Rising Bankruptcy Filings Signal Growing Financial Stress
You’re not alone if you’re considering bankruptcy to handle tax debt. According to US Courts data, bankruptcy petitions increased by 13.1 percent in the twelve months through March 31, 2025, totaling 529,080 cases. This represents a significant increase from 467,774 cases in the previous year.
Bankruptcy research shows that 77% of people filing bankruptcy identify debt collection as a factor in their financial difficulties. With IRS collection powers among the most aggressive in the creditor world, it’s no surprise that tax debt often pushes people toward bankruptcy protection.
The Immediate Relief: How Bankruptcy Stops IRS Collections
Filing for bankruptcy triggers something called the “automatic stay.” This court order immediately stops most collection activities, including IRS actions. According to the Internal Revenue Service, the automatic stay prohibits the IRS from:
- Sending collection letters or making collection calls
- Garnishing your wages
- Levying your bank accounts
- Filing new tax liens against your property
- Starting or continuing collection lawsuits.
This protection begins the moment your bankruptcy attorney files your petition with the court. For many New Yorkers drowning in tax debt, this immediate halt to collection pressure provides crucial breathing room.
Chapter 7 Versus Chapter 13: Different Approaches to Tax Debt in New York
Chapter 7 Bankruptcy: Wiping Out Older Tax Debt
Chapter 7 bankruptcy can completely eliminate certain income tax debts, but only if they meet strict requirements. Chapter 7 can eliminate your tax debt when:
- The tax liability is from at least three years ago (counting any valid extensions)
- You submitted your return no less than two years before filing bankruptcy
- The IRS placed the tax on their books at least 240 days prior to your bankruptcy petition
- You did not engage in fraudulent behavior or intentional tax evasion.
Attorney John D’Amato has helped numerous New Yorkers succeed in discharging their debts with Chapter 7 bankruptcy. In his three decades of handling bankruptcy and tax cases in New York, he notes that many clients are amazed to discover their old tax debts can be entirely erased.
Chapter 13 Bankruptcy: Handling Tax Debts That Cannot Be Discharged
When your tax debt fails to meet Chapter 7 discharge criteria, Chapter 13 bankruptcy provides an alternative approach. This option allows you to:
- Stop all IRS collection activities during your three- to five-year repayment plan
- Pay tax debt over time at manageable monthly amounts
- Potentially pay less than the full amount owed for older, unsecured tax debt
- Address both dischargeable and non-dischargeable tax debts in one plan.
What Tax Debts Cannot Be Discharged in New York
Bankruptcy won’t eliminate all types of tax debt. The following typically survive bankruptcy:
- Income taxes less than three years old
- Payroll taxes (trust fund taxes)
- Sales taxes
- Fraud penalties
- Taxes where returns were filed late or not at all.
According to the IRS Bankruptcy Tax Guide, these non-dischargeable debts remain collectible even after bankruptcy. However, Chapter 13 can still help by setting up affordable payment plans.
The Pros of Filing Bankruptcy for IRS Collections
Immediate Protection
The automatic stay provides instant relief from IRS pressure. No more sleepless nights worrying about bank levies or wage garnishments.
Potential Debt Elimination
If your tax debt meets the discharge requirements, Chapter 7 can completely wipe it out. This provides a genuine opportunity to start over financially.
Affordable Payment Plans
Chapter 13 allows you to pay tax debt over three to five years at amounts you can actually afford, often lower than IRS payment plans.
Protection from Interest and Penalties
Once discharged, you never have to pay interest or penalties on eliminated tax debt.
Comprehensive Debt Relief
Bankruptcy addresses all your debts, not just taxes. Credit cards, medical bills, and other unsecured debts can also be eliminated.
The Cons of Filing Bankruptcy for IRS Collections
Credit Score Impact
Bankruptcy significantly impacts your credit score. A Chapter 7 filing appears on your credit report for 10 years, whereas Chapter 13 remains visible for 7 years.
Not All Tax Debt Disappears
Recent tax debts, trust fund taxes, and fraud penalties typically survive bankruptcy. You’ll still owe these amounts after your case closes.
Existing Tax Liens Can Persist
When the IRS placed a tax lien on your property before bankruptcy, that lien might continue to encumber your assets even after the related debt gets discharged.
Strict Requirements
Missing any bankruptcy requirements can result in case dismissal, leaving you worse off than before.
Loss of Assets
In Chapter 7, non-exempt assets may be sold to pay creditors, though New York’s generous exemptions protect most basic necessities.
Alternatives to Bankruptcy for IRS Collections
Before filing bankruptcy, consider these IRS programs:
Installment Agreements
The IRS offers payment plans that allow you to pay tax debt over time. While you’ll still owe the full amount plus interest, this avoids bankruptcy’s credit impact.
Settlement Programs
This option allows eligible taxpayers to resolve tax debt by paying less than the total amount owed. The IRS considers your payment capacity by reviewing income, expenses, and available assets.
Currently Not Collectible Status
If paying would create financial hardship, the IRS may temporarily suspend collection efforts. However, interest and penalties continue to accrue.
New York-Specific Considerations
New York residents face both federal and state tax debt issues. New York State has its own collection powers and may pursue debts separately from the IRS. State income tax obligations typically follow identical bankruptcy discharge requirements as federal taxes.
The good news for New Yorkers is that if they file for Chapter 7 bankruptcy, they are allowed to choose either federal exemptions or New York state exemptions. In Chapter 7 bankruptcy, exemptions are specific assets that the debtor may legally keep and are protected from being sold off. New York state’s bankruptcy exemptions are among the more generous in the nation, namely:
Homestead exemption (effective from April 2024 to April 2027):
- Up to $204,825 in home equity in New York City and surrounding counties (Bronx, Kings, Queens, Nassau, New York, Richmond, Rockland, Suffolk, Putnam, and Westchester Counties)
- Up to $170,700 in Albany, Columbia, Dutchess, Orange, Saratoga, or Ulster Counties
- Up to $102,400 in all other counties.
- Married couples filing jointly can double these amounts if both spouses are on the deed.
Motor vehicle exemption (effective from April 2024 to April 2027):
- $5,500, or $13,625 if equipped for a person with disability.
Personal property exemptions (effective from April 2024 to April 2027):
- Necessary household items and clothing: Fully protected under New York law
- Most retirement accounts: IRAs, 401(k)s, Keogh, and other qualified plans are fully exempt under both federal and New York law, with no dollar cap under New York’s exemption.
- Tools of the trade: Up to $4,075 in value is exempt for tools, books, and implements necessary for your profession or business.
When Bankruptcy Makes Sense for Tax Debt
Consider bankruptcy if:
- You have substantial older tax debt that qualifies for discharge
- The IRS is taking aggressive collection actions
- You have other significant unsecured debts beyond taxes
- IRS payment plans still leave you unable to meet basic living expenses
- You’ve experienced a major life change like job loss, divorce, or medical emergency.
Attorney John D’Amato has seen how effective bankruptcy can be for the right situations. One client testimonial reads: “John made us feel very comfortable with his answers to our questions about converting from Chapter 13 to Chapter 7. He proved to us how it was better to get the Chapter 13 dismissed and then refile to Chapter 7. All of our meetings with John were in a relaxed atmosphere.”
Making the Right Decision
Deciding whether to file bankruptcy for IRS collections requires careful analysis of your specific situation. Consider factors like:
- Age and type of your tax debt
- Your total financial picture
- IRS collection timeline
- Available alternatives
- Long-term financial goals.
The decision becomes clearer when you understand exactly which debts can be eliminated and how bankruptcy will impact your specific circumstances.
The Process: What to Expect
Filing bankruptcy for tax debt involves several steps:
- Consultation: Meet with an experienced bankruptcy attorney to evaluate your situation.
- Document-gathering: Collect tax returns, IRS transcripts, and financial records.
- Means testing: Determine which chapter you qualify for based on income and expenses.
- Filing: Submit your bankruptcy petition and supporting documents.
- Automatic Stay: Collection activities stop immediately.
- Meeting of creditors: Attend a brief hearing with the bankruptcy trustee.
- Discharge: Receive elimination of qualifying debts (Chapter 7) or complete payment plan (Chapter 13).
Common Mistakes to Avoid
Filing Without Professional Help
Bankruptcy law is complex, especially when tax debt is involved. The US Trustee Program requires precise income calculations and expense documentation. One mistake can jeopardize your entire case.
Not Filing Required Tax Returns
You must file all required tax returns for the four years before bankruptcy. Missing returns can prevent discharge of tax debt.
Transferring Assets Before Filing
Moving assets to family members or hiding property before bankruptcy is fraud. This can result in criminal charges and loss of discharge.
Accumulating New Debt
Taking cash advances or making large purchases before filing can be considered abuse of the bankruptcy process.
Why Professional Guidance Matters
Tax debt and bankruptcy intersect in complicated ways. The rules for discharge, timing requirements, and procedural steps require experienced navigation. For many bankruptcy filers, it’s crucial to have the guidance of a bankruptcy attorney to avoid costly mistakes.
John D’Amato, a bankruptcy law practitioner since 1992, stresses the value of meticulous case analysis. Understanding that there are many specific reasons for financial stress, Attorney D’Amato personally works with each client to get a thorough understanding of their particular situation. He then helps them find a smart strategy towards debt relief, using approaches such as IRS tax resolutions or bankruptcy filing.
His client testimonials reflect this personalized approach. One client noted: “John was very good at giving the how and why about what Chapter to file… Very good ‘wording’… John and legal assistant Margaret made [us] feel like part of the family.”
Contact John D’Amato for Expert Guidance
John D’Amato has been helping New York residents navigate bankruptcy and IRS collections for over 29 years. As a top-rated bankruptcy and tax attorney, John D’Amato has successfully helped hundreds of clients achieve debt relief and fresh financial starts.
Recent client testimonials demonstrate the firm’s track record:
- “John and his team were amazing. They are very thorough and efficient when they handled my case. When I had a question they responded quickly.”
- “John D’Amato was extremely realistic and sincere. I never had an experience with an attorney before that was so positive.”
- “John made us feel very comfortable… All of our meetings with John were in a relaxed atmosphere and made us feel very comfortable.”
Don’t let IRS collections control your life. Call (716) 703-9099 today for a free consultation to discuss your options and determine whether bankruptcy is the right solution for your tax debt situation. John D’Amato and his experienced team will help you understand your choices and guide you toward the best path forward for your unique circumstances.
Since graduating from law school in 1992, John has spent almost his entire career helping those struggling with debt problems, including IRS tax problems. He opened John D’Amato Law Offices in 1999 to concentrate on helping individuals and families with bankruptcy and resolving IRS problems. John views his practice of law primarily as a profession and a calling, rather than a business.