Tax Debt – 6 Common Reasons Bankruptcy is Used

Posted by Michael S. Anderson | May 15, 2011 | 0 Comments

No matter what you have heard, a bankruptcy filing, motivated by tax debt, is a common occurrence.

The reason is obvious. There can be significant benefits to filing bankruptcy.

6 of the most important potential benefits are as follows:

1. The Automatic Stay

“Automatic Stay” is the common term used to describe that section of the bankruptcy code that governs what creditors must do or stop doing, once a bankruptcy is filed. It applies in every bankruptcy case. This law requires that almost every creditor in almost every situation, stop collection activity once the case is filed. This includes the IRS.

If the IRS has proper notice of the bankruptcy, the filer can actually sue the IRS for violation of the Automatic Stay Provision and recover actual damages including court costs and attorney fees, if the automatic stay provision is violated.

2. Elimination of Tax Debt after Discharge

The most obvious reason to file the bankruptcy, is the ability to get rid of the debt. As I often say, “believe it or not” certain income tax debts can be wiped away in bankruptcy along with accumulated penalty and interest. Determining “dischargeability” can be more complicated than it seems. Use of experienced legal counsel is a must.

3. Threat of Bankruptcy in an Offer in Compromise

A good bankruptcy candidate may be able to use threat of bankruptcy to obtain a better offer in compromise without ever having to file. The key? A good bankruptcy candidate and experienced legal counsel.

4. Force payment plan

In a chapter 13 bankruptcy a payment plan can be forced on the IRS, if the IRS won't agree to a better and more reasonable payment plan outside of bankruptcy

Whether the plan is approved is not up to the IRS, but decided by bankruptcy law and the bankruptcy judge.

5. Deal with all other debt at same time

Most with serious tax debt have other debt problems as well. Credit card debt, medical bill debt, foreclosure issues, business related debt etc. etc.

A bankruptcy, chapter 7 or 13 depending on which best fits, can deal not only with the tax debt but also with these other problems, via discharge, cramdown, or payment.

6. Re-determination of Taxes Due

The bankruptcy code allows the Bankruptcy Court to re-determine the amount of tax owed. Bankruptcy can be used to determine the amount of the debt even if you lost the argument in tax court.

If you have serious tax debt, you should talk to an attorney experienced in the relationship between tax debt and bankruptcy in order to find the best solution to the problem.

About the Author

Michael S. Anderson

Michael Anderson has been representing Arizona clients with tax debt problems for two decades and has helped his clients eliminate millions of dollars in tax debt. His tax debt practice is limited to helping individuals and the self-employed who have serious IRS problems.


There are no comments for this post. Be the first and Add your Comment below.

Leave a Comment


Aenean lacinia bibendum nulla sed consectetur. Donec sed odio dui. Maecenas sed diam eget risus varius blandit sit amet non magna. Nulla vitae elit libero, a pharetra augue. Curabitur blandit tempus porttitor. Morbi leo risus, porta ac consectetur ac, vestibulum at eros. Cras justo odio, dapibus ac facilisis in, egestas.

Contact Us Today

If you have an IRS problem, call our office and ask to speak with the Attorney about it. We like to discuss the situation on the phone for free to ask you some questions, answer some of yours, and to determine whether it may make sense for us to help. We’ve helped several thousand clients with tax debt problems over the last two decades. We’ll tell you the truth about your options and help you find the best one.