The first thought that comes to mind when a person has a large tax liability is to file an Offer in Compromise to settle with the IRS for a lower amount than the taxpayer owes. The Offer in Compromise is a wonderful program and can be a great option for most people who owe a large sum of money to the IRS but an Offer in Compromise only resolves IRS tax debt. Often times, when a person has a large IRS or state tax liability, that person is also struggling to meet other financial obligations. For these people, a bankruptcy may be a better option.
A debtor may file for bankruptcy under various chapters of the Bankruptcy Code. However, the vast majority of people will file either a Chapter 13 or Chapter 7 Bankruptcy. A Chapter 13 Bankruptcy is known as the debt restructuring bankruptcy. In a Chapter 13, the debtor makes a monthly payment to the Chapter 13 Trustee. The Chapter 13 Plan can be either 3 or 5 years, depending on various factors such as the types and amounts of debts included in the bankruptcy.
A Chapter 7 Bankruptcy is known as the debt liquidation bankruptcy. Unlike the Chapter 13, a Chapter 7 Bankruptcy does not require the debtor to make a monthly payment to the trustee. Naturally, a Chapter 7 Bankruptcy seems more appealing to a debtor at first blush but a Chapter 13 may be better depending on factors such as the types of debts included.
Many taxpayers with large tax liabilities are also delinquent on secured loans such as their house payment. In that case, even if the taxpayer is able to settle his or her tax liability for significantly less than what is owed, an Offer in Compromise may push the taxpayer’s home into foreclosure. Because the taxpayer is required to pay the Offer in Compromise within either 5 months or 2 years of acceptance, taxpayers often find themselves having to choose between saving their home or getting rid of the IRS.
Because certain taxes are dischargeable in bankruptcy, it may allow taxpayers to both settle their IRS and State tax liabilities while relieving them of other unbearable debts. While the general rule says that taxes are dischargeable in bankruptcy after three years of the filing date, there are a number of exceptions and additional rules that dictate whether a particular tax liability may be discharged in Bankruptcy.
At Martelle, Bratton, & Associates, we specialize in dischargeability of taxes in bankruptcy. In fact, Mr. Martelle authored a manual to serve as a guide for other tax and bankruptcy attorneys to use for their tax dischargeability analyses. As tax practitioners, we have priority access to documentation and information that will quickly tell us whether your tax liability may be dischargeable in bankruptcy.
Have debt issues? Contact a Idaho bankruptcy attorney
Click here or call (208) 938-8500 for a free consultation! To see whether a Chapter 7 or Chapter 13 would best resolve your tax liability and other debts, read our next blog titled “Restructuring versus Liquidation Bankruptcy.”