The Chapter 7 3-2-240 Rule Explained

Filing for Chapter 7 bankruptcy can offer a fresh start by discharging overwhelming debts. While many people know it can eliminate credit card balances and medical bills, they are often surprised to learn that some income tax debts can also be wiped out. This process, however, is governed by a set of strict timing requirements known as the Chapter 7 “3-2-240 Rule.”

Understanding this rule is essential for anyone hoping to include tax debts in their bankruptcy filing. The Law Offices of Michael Schwartz will break down each component of the 3-2-240 rule to help you understand if your tax debts might be dischargeable.

The 3-Year Rule: Tax Return Due Date

The first condition of the 3-2-240 bankruptcy rule relates to when the tax return was originally due.

  • Rule: The due date for filing the income tax return must be at least three years before you file your bankruptcy petition.

This includes any valid extensions you may have received. For example, if your 2020 tax return was due on April 15, 2021, you would need to wait until after April 15, 2024, to file for bankruptcy for that specific tax debt to be considered under this rule.

The 2-Year Rule: Tax Return Filing Date

The second condition focuses on when you actually filed the tax return. It’s not enough for the due date to have passed; you must have also submitted the return.

  • Rule: The tax return for the debt in question must have been filed at least two years before you file your bankruptcy petition.

This rule prevents individuals from filing long-overdue tax returns right before filing for bankruptcy. If you filed your 2018 tax return on June 1, 2022, you must wait until after June 1, 2024, to file for bankruptcy and have that debt considered for discharge.

The 240-Day Rule: Tax Assessment Date

The final timing requirement involves the date the tax was officially assessed by the taxing authority, such as the IRS.

  • Rule: The tax must have been assessed by the taxing authority at least 240 days before you file your bankruptcy petition.

The assessment date is when the IRS officially records the tax liability. This period can be extended under certain circumstances, such as if you had an offer in compromise pending with the IRS.

Important Considerations for Discharging Tax Debt

Meeting all three timing conditions of the 3-2-240 rule is just the first step. Several other factors can affect whether your tax debt can be discharged:

  • All Three Rules Must Be Met: You must satisfy the 3-year, 2-year, and 240-day rules for the same tax debt. Failing to meet even one of these requirements will likely make the tax debt non-dischargeable.
  • No Fraud or Evasion: The tax debt cannot be the result of tax fraud or a willful attempt to evade paying taxes.
  • Income Taxes Only: The 3-2-240 bankruptcy rule applies specifically to personal income taxes. Other types of tax debts, like payroll (trust fund) taxes or sales taxes, are generally not dischargeable.
  • Tax Liens: Even if your personal liability for the tax debt is discharged, a previously filed tax lien may survive the bankruptcy. This means the government could still have a claim against your property.

How a Bankruptcy Lawyer Can Help

Navigating the complexities of the Chapter 7 3-2-240 rule requires careful attention to detail. The specific dates for filing, due dates, and assessments are critical. Miscalculating these dates could result in your tax debt remaining after your bankruptcy case is closed.

Before filing, it is crucial to consult with an experienced bankruptcy lawyer. An attorney can help you order your IRS account transcripts to confirm the exact dates and determine if your tax debts qualify for discharge.

At The Law Offices of Michael Schwartz, we help individuals, couples, and businesses in Bucks County, Pennsylvania, find relief from overwhelming debt. We can review your financial situation, explain the bankruptcy exemptions available to protect your property, and guide you through every step of the Chapter 7 process.

Take the Next Step Toward Financial Freedom

Determining whether your tax debts are dischargeable is a complex but important part of the bankruptcy process. If you are struggling with debt, don’t hesitate to seek professional advice.

Contact Michael Schwartz, a Bucks County bankruptcy lawyer, for a free consultation. We can help you understand your options and pursue the best course of action for your financial future.