Bankruptcy is already a difficult situation to be in. But when income drops or medical issues arise, unpaid taxes and hospital bills can add more stress to a person who is already at their lowest. Many people in the Memphis area feel pressured and trapped by notices, calls and fear of losing their home or car. Legally filing bankruptcy may offer relief, but these debts often follow different rules. Understanding those rules helps struggling individuals make informed choices during a difficult time.
How bankruptcy affects different types of back taxes
Under federal law, some older income tax debts might qualify for discharge if they meet the 3-2-240 rule. To meet this rule, three conditions are necessary:
- 3: The tax return was due three years before filing
- 2: The individual filed a valid return two years prior
- 240: The Internal Revenue Service (IRS) assessed the tax 240 days before filing
Chapter 7 and Chapter 13 bankruptcy treat back taxes differently. Chapter 7 allows individuals to erase taxes that meet specific criteria, but they remain liable for those that do not. Meanwhile, Chapter 13 treats eligible taxes as regular debts and requires paying off ineligible taxes through an agreed payment plan.
What happens to medical bills?
Bankruptcy typically categorizes medical debt as a non-priority unsecured debt, similar to credit card balances and personal loans. This allows individuals to wipe it out in Chapter 7 bankruptcy or pay it off through a court-approved plan in Chapter 13 bankruptcy. The following medical bills often qualify:
- Emergency room and ambulance fees
- Surgeries and outpatient procedures
- Laboratory tests, X-rays and MRIs
- Prescription medications and medical equipment
- Dental and vision care
In early 2025, a federal rule aimed to ban all medical debt from credit reports, but a federal court vacated it in July 2025. This means that at the federal level, medical collections over $500 can still appear on credit reports until discharged in bankruptcy, although some states have their own bans.
Taking the next step with clearer expectations
Bankruptcy does not erase every debt, but it reduces pressure and stops collection activity. For people under financial strain, working with a bankruptcy lawyer can help remove confusion and provide knowledge to support smarter decisions. Financial stability will not happen overnight, but the process can start today.