Many of our clients have large IRS debt and some don't qualify well to settle their debt in an IRS offer in compromise. The truth is…most people with tax debt don't. (Read more about IRS Offers in Compromise and how they work)
If the debt is correct and they don't qualify to settle the debt in an IRS Offer in Compromise, where does that leave them?
They usually end up in a payment plan either based on time, or in one that uses their actual income, but an un-friendly budget that is partially created by the IRS itself.
The common problem with both of these outcomes is that the client is in a payment plan that is just too big.
The payment doesn't take into account their other consumer debt, the actual cost of their home, cars, and a great many other expenses.
The client is forced to downsize their budget dramatically and often unrealistically…. causing lots of stress and other significant issues.
For that client, the one stuck in a payment plan with the IRS that doesn't take into account all of their budget items including other debt…a chapter 13 bankruptcy will often make sense.
In a chapter 13 bankruptcy, the law allows a few things that can make the situation easier and more realistic than a payment plan based on the IRS' budget.
A chapter 13 bankruptcy, can also allow you the following:
- Use your actual, reasonable mortgage payment and home related expenses as a budget item
- Use your actual, reasonable car loan payment as a budget item
- Use some expenses related to entertainment and miscellaneous items as budget items
- Ignore your social security related income..as income
- Treat some or all of your tax debt as dischargeable
- Treat all of your IRS penalty as dis-chargeable
- Treat your other consumer and budget related debt as dis-chargeable
- Cram down the interest rate you are paying on your car
- Cram down the principal debt on your car where the loan is 2.5 years old and the car is upside down
- Sometimes pay just a fraction of the debt that is owed on taxes, consumer, and business debt
- Stop foreclosure and repossession
- Force all collection activity to stop
- Force the IRS into a payment plan on new tax debt that takes into account all of the above
- Protect your assets
- Resolve all debts either by discharge or payment within 60 months except non-dischargeable/non-priority tax debt.
If you are in a payment plan with the IRS and are finding it difficult….this list may sound pretty good.
But…before you meet with me about it, you need to understand that there are things that make a chapter 13 difficult and sometimes impossible as well.
PAYING WHAT'S REQUIRED TO BE PAID
In a Chapter 13 Bankruptcy, you must be able to make a payment that's large enough to pay certain items like:
- Priority Tax Debts – tax debts that are too new to be treated as dischargeable
- Priority Child Support and Spousal Maintenance arrears – if you are behind on either the arrearage is paid through the plan
- Car Loans with Interest
- Attorney Fee and Chapter 13 Trustee Fee
- An amount to general unsecured debt that equals the value of your non-exempt assets
- Home Mortgage and HOA Arrears
- An amount to general unsecured debt that satisfies the means test results
For most people with large tax debt and an inability to use an offer in compromise, this list though difficult at first glance, is typically doable and it will leave them with much more money in their living expense budget than the IRS payment plan did. (We wouldn't let you file a Chapter 13 Bankruptcy unless that were true)
LACK OF A STEADY INCOME
A lack of a steady income is a chapter 13 killer. It doesn't matter where that income comes from…it it's going to be regular and steady, the odds of a successful chapter 13 bankruptcy go up. If income is going to drop dramatically during the plan….or go up dramatically during the plan…the plan may not make sense and if filed will probably fail.
LATE TAX RETURN FILINGS
The last 4 years returns have to be filed in a Chapter 13 Bankruptcy. If they aren't, the case will be dismissed. For our tax debt clients, this is sometimes a problem. But there are good reasons why filing the returns are helpful besides keeping your plan alive. We need to know whether you owe the IRS or not before filing and how much.
YOUR DEBTS CAN'T BE TOO HIGH
You can't use chapter 13 Bankruptcy if your debts are too high. The vast majority of people don't have debt that comes anywhere close to these debt limits…but a few do.
Sometimes we use a chapter 7 first to get a client's debt within the limits… and then we use the Chapter 13 to get those benefits.
IT'S A BUSINESS
A business can't use a chapter 13 bankruptcy. The owner of a business can, a sole proprietor can, but not the business itself.
Many business owners file chapter 13 and use it to deal with debts it shares with the business while leaving the business liable for the debt.
A sole proprietor is the business. There isn't a separate entity that will continue to owe the debt.
A CHAPTER 7 MIGHT MAKE MORE SENSE THAN A CHAPTER 13 BANKRUPTCY AND AN IRS PAYMENT PLAN
What if you qualify to file a chapter 7 bankruptcy instead of a 13. What if you pass the means test or the greatest portion of all your debt is tax debt (or other non-consumer debt). A chapter 7 bankruptcy may make more sense. It may allow you to get rid of other debt and some or all of your tax debt. Even if not all of your tax debt were wiped away…enough may be wiped away that you could re-negotiate a payment plan with the IRS that is much friendlier to your budget.