Can You Stop IRS Wage Garnishment by Filing for Bankruptcy?
Although filing for bankruptcy can stop an IRS wage garnishment, you will still have to pay off your tax debts.
If the IRS has garnished your wages for unpaid taxes, filing for bankruptcy can give you some relief. It's only temporary, however: Bankruptcy doesn't wipe out most tax debts. This means you will still owe them when your bankruptcy case is over (unless you pay them all off in a Chapter 13 repayment plan).
Wage Garnishments for Taxes
Most creditors to whom you owe money must file a lawsuit against you, win, and get a court judgment to garnish your wages. Once the creditor gets its garnishment order, your employer must withhold a certain amount of money from each paycheck and send it directly to the creditor, until your debt is paid off.
For a few types of debt, however, the creditor doesn't have to sue you first. For example, if you are ordered to pay child or spousal support, the court that handles your divorce will issue an order directing that the amount you owe be withheld from your earnings and sent directly to your former spouse.
If you owe money to the IRS, it can immediately garnish your earnings, and it doesn't have to get a court order first. The amount you will get to keep depends on your standard deduction amount and how many dependents you have. The IRS will send a wage levy notice to your employer, who must give you a copy. If you owe money to a state or local government taxing authority, your wages can also be garnished. However, some state laws limit how much can be withheld from your paycheck for these purposes.
What Happens When You File for Bankruptcy
When you file for bankruptcy, a court order called the "automatic stay" goes into effect immediately. The automatic stay stops almost all types of debt collection actions for the duration of the bankruptcy case. This gives you a chance to get back on your feet and gives the bankruptcy trustee a chance to assess your situation and decide who should get what. The automatic stay also stops wage garnishments, except those to collect child support (which continue throughout your bankruptcy case and beyond).
If you file under Chapter 13, you must pay off any back taxes you owe in full through your repayment plan. The wage garnishment will stop; in its place, you will have to make a monthly payment to the trustee, to cover this and other debts. Certain debts must be paid off completely in Chapter 13, including tax debt and child support; other debts might be paid off in full, in part, or not at all, depending on your ability to pay and other factors. If you pay off your tax debt fully in Chapter 13, you will no longer owe anything when your case is over.
In Chapter 7, you don't repay any debts. Your creditors might receive some money if you have nonexempt property that the trustee takes and sells, but you don't have to make payments in bankruptcy. Once your case is over, all dischargeable debts are wiped out. However, most tax debts cannot be discharged in bankruptcy; in other words, you will still owe them when your bankruptcy case ends. Although filing for bankruptcy will stop the IRS wage garnishment while your case proceeds, your tax debts will be waiting for you when it's over. As such, Chapter 7 bankruptcy is only a temporary solution to this problem.