IRS installment agreement vs. Chapter 13 bankruptcy: Which repayment plan saves you the most?

January 2, 2010

in Bankruptcy - Chapter 13, Bankruptcy and the IRS, Installment agreements, Interest and penalties

Trying to repay the IRS in an installment agreement can be difficult.  The interest and penalties the IRS charges doubles the original amount of tax you owe every five years.

Your installment agreement may keep the IRS at bay, but your tax liability does not get paid off.

The tax code and the IRS offers no real way of stopping interest and penalty accruals.  That is frustrating, but there are solutions.

The solution for many is in the bankruptcy code.  An IRS repayment plan made through a Chapter 13 bankruptcy can stop IRS interest and eliminate penalties. Chapter 13 can even reduce the amount of tax you pay.  This often results in a shortening the time it will take you to repay the IRS.

No one really wants to file bankruptcy, but making your installment payments by bankruptcy law, not tax law, can result in substantial benefits to you.

A Chapter 13 bankruptcy repayment plan can help you with the IRS.  Here’s how:

(1)     Interest stops.  Chapter 13 stops the IRS from charging you interest while you make your payments.  The interest you already owe the IRS can also be reduced by bankruptcy law.

(2)     Penalties can be reduced.  Chapter 13 can stop the accrual of IRS penalties.  Bankruptcy law can also force the IRS to accept a reduction in the penalties already charged.

(3)     Repay a percentage of what you owe to the IRS.   The amount of tax, interest and penalties repaid to the IRS can be as little as 1% by Chapter 13 bankruptcy law (vs. 100% in IRS installment agreements).  This is accomplished by use of the Chapter 13 bankruptcy “cramdown” rules.  You pay back olny what you can afford on older income tax debts in a Chapter 13.  Anything you cannot afford to repay on the older taxes is eliminated.

(4)     IRS collections stop.  Once you file a Chapter 13, the IRS is prevented from levying your property.  Bankruptcy creates a “stay” on the IRS.  You keep everything in a Chapter 13 tax bankruptcy.

(5)     Your budget.  If the IRS will not allow some of your expenses in an installment agreement, bankruptcy law could.  A Chapter 13 tax bankruptcy means you pay the IRS what your reasonable budget permits under bankruptcy law standards.  You eliminate much of the use of IRS “living expense standards.”

In most cases, the Chapter 13 bankruptcy results in you paying back much less than what you would in an IRS installment agreement.  What you pay does not double by tax law, but can be reduced by bankruptcy law.  Comparison of a Chapter 13 repayment plan vs. IRS installment agreement can save you time and money.

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