If you're thinking of filing Chapter 7 bankruptcy you may have debts for past due income tax obligations. Before you file your case, you need to understand exactly what will happen to your income tax debts if you file Chapter 7.

Income tax debts cannot be discharged in a Chapter 7 bankruptcy if:

the tax return was due to be filed less than three years before the filing of the bankruptcy;

OR the taxes were not assessed within 240 days of the petition.

There are additional exceptions for cases involving fraud and late tax filings, so if you've got those issues then your lawyer will need to take an extra look at your situation.

An additional wrinkle arises when the taxing authority has filed a lien for the unpaid taxes. Though the underlying tax obligation may be wiped out in a Chapter 7 bankruptcy, the lien itself remains in place. If you don't own any non-exempt property at the time your Chapter 7 case is filed, you're in the clear.

But what if you own a house with non-exempt equity when you file for Chapter 7 bankruptcy? In that case, the IRS lien will remain on your house until you sell or refinance. At that time, you'll need to pay the lien amount in order to go forward with the transaction.

Of course, if you don't have any immediate plans to sell or refinance you may be in the clear. Why? Because tax liens expire after 10 years unless they are renewed.

So if you're planning on staying put for more than 10 years (and the taxing authority doesn't renew the lien) then you may be able to completely end your requirement to pay those discharged tax debts.