Can You Discharge New York State Taxes in Chapter 7 Bankruptcy?
If you owe New York State income taxes, you may wonder whether bankruptcy can help eliminate that debt. The answer is: yes—but only under strict conditions. In a Chapter 7 case, certain income tax debts can be discharged, but only if you meet specific timing, filing, and good-faith requirements under 11 U.S.C. § 523.
Below, we’ll walk through the legal test—known informally as the “3-2-240 rule”—and explain how it works in New York, supported by key case law and federal standards.
🧾 The “3-2-240” Rule for Discharging NYS Taxes
To discharge New York State income tax debt in Chapter 7, the following four conditions must be met:
✅ 1. Three-Year Rule
The tax return must have been due at least 3 years before the date you filed your bankruptcy petition (including extensions).
📚 Legal basis: 11 U.S.C. § 507(a)(8)(A)(i), as applied through § 523(a)(1)
📘 In re Palmer, 219 F.3d 580: The court held taxes due more than three years before filing were dischargeable.
✅ 2. Two-Year Rule
You must have actually filed the tax return at least 2 years before your bankruptcy case was filed.
📘 In re Cole, 328 B.R. 237: The court found that returns filed late but more than two years before filing were still valid for discharge—as long as they weren’t fraudulent.
✅ 3. 240-Day Rule
The taxes must have been assessed by New York State at least 240 days before the bankruptcy was filed.
📘 In re Hanna, 872 F.2d 829: The court applied this rule to federal and state tax debts, affirming nondischargeability where the assessment was too recent.
✅ 4. No Fraud or Willful Evasion
You must not have:
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Filed a fraudulent return
-
Willfully attempted to evade the tax
📘 In re Cole and In re Mills, 337 B.R. 691: Both cases underscore that intentional underreporting, manipulation, or concealment can render the debt nondischargeable under § 523(a)(1)(C).
❌ When NYS Taxes Cannot Be Discharged
Even if you meet the timing rules, your NYS tax debt may still be nondischargeable if:
✘ You never filed a return
📘 In re Giacchi, 856 F.3d 244: A debtor’s last-minute or substitute returns were not treated as valid “returns” under the Bankruptcy Code.
✘ You filed the return after filing for bankruptcy
📘 Pansier v. United States, 2011 U.S. Dist. LEXIS 45539: The court ruled that a return filed after the bankruptcy petition cannot support discharge.
📍 New York-Specific Notes
The New York State Department of Taxation and Finance aggressively pursues tax debt. But if the tax is old, you’ve filed your return on time (or more than two years ago), and there’s no fraud or recent assessment, you may be eligible for a full discharge in Chapter 7.
If the tax isn’t dischargeable, Chapter 13 may allow you to repay the debt over 3–5 years with no interest or penalties—and while protected from garnishments or bank levies.
🧠 Summary: When Can NYS Tax Debt Be Discharged in Chapter 7?
| Requirement | Rule | Source |
|---|---|---|
| Return due 3+ years ago | ✅ Yes | § 507(a)(8)(A)(i) |
| Return filed 2+ years ago | ✅ Yes | § 523(a)(1)(B)(ii) |
| Tax assessed 240+ days ago | ✅ Yes | § 507(a)(8)(A)(ii) |
| No fraud or evasion | ✅ Required | § 523(a)(1)(C) |
| Filed return yourself (not by NYS) | ✅ Required | Giacchi, Pansier |
📞 Need Help with NYS Tax Debt and Bankruptcy?
At The Law Office of William Waldner, we’ve helped hundreds of New York clients eliminate or restructure state tax debt through bankruptcy. We’ll evaluate whether your NYS taxes are dischargeable and fight for full protection under the law.
📍 Serving clients in Manhattan, the Bronx, Brooklyn, Queens, Staten Island, and White Plains.
👉 Schedule your free consultation
or call us at (212) 244-2882