Writing Off Tax Debt in Personal Bankruptcy: New Rules of the Game

At first glance, Part 2 of Article 125 of the Bankruptcy Procedures Code of Ukraine contains an attractive provision for debtors: tax debt that arose within three years prior to the commencement of insolvency proceedings against an individual is deemed bad debt and may be written off during the debt restructuring procedure.

This provision became the subject of analysis by the Supreme Court in its decision of 27 May 2026 in case No. 908/1194/24. In this judgment, the Court established a comprehensive approach to the issue of tax debt discharge and defined the limits of applying this mechanism.

Tax Debt Write-Off Is Not Automatic

The Supreme Court's key conclusion is that the application of Part 2 of Article 125 of the Bankruptcy Procedures Code cannot be reduced to a simple comparison of calendar dates. The Court expressly stated that even if a tax debt formally falls within the three-year criterion, this does not automatically mean that it must be discharged. This approach is entirely logical. Otherwise, insolvency proceedings could become a mechanism for artificially avoiding tax liabilities.

When Does Tax Debt Arise?

The Supreme Court paid particular attention to one of the most debated issues.

For the purposes of Article 125 of the Bankruptcy Procedures Code, the moment when tax debt arises must be determined in accordance with the provisions of the Tax Code of Ukraine.

Tax debt does not arise on the date a tax assessment notice is issued or challenged. Instead, it arises on the first day of default following the expiration of the statutory period for voluntary payment of an agreed monetary obligation. This date is crucial in determining whether the debt falls within the statutory three-year period.

What Must the Court Establish?

The Supreme Court effectively created a checklist for commercial courts.

Before recognising tax debt as bad debt and writing it off, the court must establish:

• whether tax debt exists as an unpaid agreed monetary obligation;
• when exactly the debt arose and whether it meets the three-year criterion;
• the debtor's financial and property status and whether there is a real possibility of satisfying creditors' claims;
• whether the restructuring procedure has been properly conducted and whether all statutory actions have been performed by the restructuring administrator;
• whether the debtor has acted in good faith and whether there are any signs of abuse of the bankruptcy procedure.

In essence, the Supreme Court emphasised that personal insolvency proceedings cannot be used as a mechanism for simply "resetting" tax liabilities without a thorough examination of the debtor's financial circumstances.

Good Faith Becomes a Key Factor

The Court's findings regarding the principle of good faith deserve special attention. The Commercial Cassation Court expressly referred to the heightened risks of abuse, particularly where the tax authority is the sole or principal creditor in the case. This means that courts must examine not only formal documents but also the debtor's actual conduct, including:

• whether assets were concealed;
• whether declarations and disclosures were truthful and complete;
• whether the debtor took reasonable steps to satisfy outstanding obligations;
• whether genuine insolvency actually exists.

Without examining these circumstances, any decision to write off tax debt is premature.

Practical Significance for Debtors and Insolvency Practitioners

The Supreme Court's judgment in case No. 908/1194/24 significantly raises the evidentiary standards in personal insolvency proceedings.

For debtors, this means that the mere existence of a tax debt that formally arose more than three years before the commencement of insolvency proceedings no longer guarantees its discharge.

For insolvency practitioners, the judgment serves as a reminder of the need to meticulously perform all procedural duties, including reviewing declarations, conducting asset inventories, analysing income sources and documenting the debtor's actual financial condition.

For tax authorities, this legal position provides additional opportunities to protect the state's interests and challenge cases of formal or unjustified tax debt write-offs.

Ultimately, the Supreme Court has taken another important step toward developing a balanced model of personal bankruptcy, where debt restructuring serves as a mechanism for restoring the solvency of an honest and good-faith debtor rather than an instrument for unconditional discharge of tax liabilities.