The automatic stay will stop the IRS from collecting taxes debt that you owe once you file a Chapter 7 or Chapter 13 bankruptcy. But depending upon the nature of the tax debt you owe, the IRS may be permitted to collect from you later. Continue reading for more information about the automatic stay in bankruptcy and what it can do to help you with your tax debt.
The Automatic Stay and the IRS
The moment you file a consumer bankruptcy, a mechanism called the “automatic stay,” or auto-stay, stalls most legal proceedings and prohibits your creditors from continuing collection efforts. This means creditors can’t sue, garnish, bill, or call you, or otherwise attempt to collect a debt you owe. The auto-stay applies to the IRS as well. While the automatic stay is in place, the IRS cannot send you collection notices, garnish your wages or bank accounts, or even offset your tax refund.
The automatic stay expires when your bankruptcy discharge is entered or your case is closed or dismissed, whichever happens first. If you owe tax debt to the IRS, it might hold your refund until the automatic stay expires, so that it can collect by taking back some of your refund. Also, while the IRS is not allowed to collect for itself while the automatic stay is in effect, it may offset your refund to pay back persons to whom you owe child support -- because child support collections are not stopped by the automatic stay.
(To learn more about the automatic stay, see Bankruptcy's Automatic Stay.)
Limits to the Automatic Stay
The auto-stay may be limited to 30 days after you file your case if you filed another bankruptcy in the previous year and voluntarily dismissed that case. This limit was put into place to prevent debtors from filing multiple bankruptcies just to hold their creditors at bay. If you filed a bankruptcy in the last year, you can request that the court extend the auto-stay, but you must first show the court that you filed your cases in good faith and not to abuse the auto-stay.
If you filed two or more bankruptcies in the previous year and voluntarily dismissed them, you will not be protected by the auto-stay, unless you prove to the court that you filed in good faith.
Additionally, a creditor can request relief from the auto-stay, meaning it can ask the court for permission to collect. Most commonly, this happens with secured debt related to real estate or cars, but the IRS can seek relief from the court if you committed tax fraud. (Learn more about when and how a creditor can lift the automatic stay.)
The Automatic Stay Does Not Apply to Debt Incurred After Filing Bankruptcy
The auto-stay serves to protect you from creditors trying to collect debt you incurred before you filed bankruptcy. The auto-stay does not prevent creditors from trying to recover debt you incurred after you filed your bankruptcy, also called “post-petition debt.” If you incurred tax debt after filing a Chapter 7 or 13 bankruptcy, the automatic stay will not prevent the IRS from attempting to collect.
Is Tax Debt Discharged in Bankruptcy?
Although the automatic stay will stop the IRS or state taxing authority from collecting tax debts during your bankruptcy (subject to the above limitations), whether your tax debt will be wiped out at the close of your bankruptcy is another matter. To learn more, see our area on Tax Debts in Bankruptcy.