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Income Taxes in Bankruptcy

In New Jersey, the application of bankruptcy law to income taxes is a very complicated matter. This portion of the website provides a very general explanation regarding an individual debtor’s income tax liability and the application of bankruptcy. It is very important to note that there are numerous exceptions and variations of the law and the information provided is very general.

Income taxes may be discharged (eliminated) in bankruptcy, under certain circumstances. Income taxes may be classified as a secured debt and/or priority debt and/or unsecured debt. An individual may have a portion of their income tax liability classified as priority debt, a portion classified as unsecured debt, and a portion that is classified as secured debt. The bankruptcy laws pertaining to income taxes are the same for federal taxes that are due to the Internal Revenue Service and New Jersey state taxes that are due to the State of New Jersey, Division of Taxation.

The portion of income taxes that are classified as unsecured and/or secured and/or priority will be treated as such pursuant to the bankruptcy code. In other words, income tax that is treated as priority debt will be treated like other priority debt, etc. You can read more about income tax priority debt in our section about priority debt. Although Income tax debt may be classified as secured, neither the State of New Jersey nor the Internal Revenue Service will commence a mortgage foreclosure action against the debtor.

Individuals’ Income Taxes

Note: This section does not pertain to corporate or partnership income taxes.

The following explains income tax classified as priority debt. Any income tax liability due in connection with a tax year for which no return was filed, is treated and classified as priority debt. Income taxes that are due and timely filed, within three years from the date that the taxes are due and the date of the bankruptcy filing are classified as priority debt. A tax liability may be considered both priority and secured.

The following explains unsecured income taxes. An income tax liability in connection with a timely filed tax return, which was filed and due more than three years before the bankruptcy filing may be classified as unsecured. Unsecured income taxes may be discharged.

The following is an explanation with regard to secured income tax debt. Income tax debt is classified as secured if the State of New Jersey, Division of Taxation, and/or the Internal Revenue Service accurately filed a legal tax lien in the debtor’s county in New Jersey. The amount of the secured portion of the tax liability depends on the value of the debtor’s personal and real property minus the secured interest in that particular property. The debtor may not apply any exemptions to reduce the amount of the secured lien.

Contact a Bankruptcy Attorney in New Jersey

The New Jersey bankruptcy code has special considerations when it comes to income taxes, which is just one example of the many nuances of the NJ bankruptcy laws. Prior to filing, it is important that you understand how bankruptcy will effect you, and why. Robert Manchel has many years of experience with New Jersey bankruptcy laws. He will be able to answer your questions and identify potential issues, before they become a problem. For a free consultation, contact the NJ bankruptcy law firm, The Law Offices of Robert Manchel.