Can federal income taxes be discharged in bankruptcy in the 7th Circuit?
Yes, but only if strict timing rules are met.
In the 7th Circuit (including Illinois), federal income taxes may be discharged in bankruptcy only if all of the following are true:
- The tax return was due (including extensions) more than 3 years before filing the bankruptcy.
- The tax return was actually filed more than 2 years before filing the bankruptcy.
- The tax was assessed more than 240 days before filing the bankruptcy.
- There was no fraud or willful attempt to evade taxes
These rules are applied strictly by bankruptcy courts in the Northern, Central, and Southern Districts of Illinois.
Are taxes dischargeable just because the IRS filed a tax lien?
No.
In the 7th Circuit, the existence of a federal tax lien does not make a tax dischargeable.
Bankruptcy courts treat:
- Tax dischargeability (11 U.S.C. § 523(a)(1)), and
- Lien survival
as separate legal questions.
If a tax fails the 3-year, 2-year, or 240-day rules, it is not discharged, even though a lien would survive in any event.
What happens if federal taxes do NOT meet the timing rules?
If federal income taxes are not dischargeable:
- Personal liability survives bankruptcy
- The IRS may resume collection after discharge
- Wage garnishments and bank levies may continue
- Existing federal tax liens remain enforceable
This is true in Chapter 7 and Chapter 13 unless the tax is paid or otherwise resolved through a confirmed plan.
If taxes ARE discharged, what happens to the federal tax lien?
In the 7th Circuit, the rule is clear:
- The personal obligation to pay the tax is discharged
- The federal tax lien survives against property owned on the petition date
- The lien is limited to the value of that property
- The IRS cannot pursue the debtor personally after discharge
This follows long-standing Supreme Court and circuit-level authority applied uniformly in Illinois bankruptcy courts.
Does a surviving tax lien attach to future income after bankruptcy?
No.
After discharge in the 7th Circuit:
- A surviving federal tax lien does not attach to wages earned after filing
- It does not attach to new bank accounts
- It does not attach to property acquired after bankruptcy
The lien is frozen as of the petition date.
Can a federal tax lien be avoided using exemptions in Illinois?
No.
In Illinois and throughout the 7th Circuit:
- Federal tax liens cannot be avoided using the homestead exemption
- 11 U.S.C. § 522(f) does not apply to tax liens
- Bankruptcy does not “strip” IRS liens in Chapter 7
However, lien enforcement is limited to the actual value of the property.
Is Chapter 13 better than Chapter 7 for IRS debt in the 7th Circuit?
Often, yes — but not always.
Chapter 13 may allow:
- Payment of priority taxes over time
- Protection from IRS collection during the plan
- Strategic delay to meet discharge timing rules
- Better control over lien exposure
Chapter selection depends on tax age, assessments, assets, and income.
Why is bankruptcy timing especially important in Illinois tax cases?
Because filing too early can:
- Preserve IRS priority status
- Prevent discharge of income taxes
- Allow full IRS collection after bankruptcy
In the 7th Circuit, courts apply tax timing rules literally, not equitably.
Even a few months can change the outcome.
What is the bottom line for IRS Debt and bankruptcy in the 7th Circuit?
In the 7th Circuit, federal income taxes that do not meet the 3-year, 2-year, and 240-day rules are not discharged in bankruptcy — even though a federal tax lien would survive discharge anyway.
How can Thinking Outside the Box Law, Inc. help?
At Thinking Outside the Box Law, Inc., we focus on the intersection of bankruptcy law and tax law in Illinois and the 7th Circuit.
Our approach emphasizes:
- Timing
- Mathematical analysis
- Strategic use of Chapters 7 and 13
This is where many firms miss opportunities — and where we routinely find solutions.
Schedule a consultation to evaluate whether bankruptcy, timing, or strategy can reduce or eliminate IRS debt.