What is the better option: Bankruptcy or OIC?
If you are having serious problems paying the IRS, bankruptcy or Offer in Compromise can be the way out. One of the most important aspects of choosing either bankruptcy or OIC is how much the settlement amount will be.
Most of the time, you can get the lowest possible settlement amount if you file for a chapter 7 bankruptcy. Here, you need to have assets of little value (which will class it as a ‘no asset’ bankruptcy). The majority of chapter 7 bankruptcies are no asset bankruptcies, since chapter 7 means you have probably ended up at in the worst financial state possible.
So long as you meet three criteria, you will owe the IRS nothing under a “No Asset Chapter 7 Bankruptcy”. These three criteria are as follows:
1. The debt you have to the IRS is in the form of income tax.
2. The bankruptcy was filed at least 2 years after the tax return.
3. All returns you owe money for were filed at least 3 years before you filed for the bankruptcy.
The other type of bankruptcy, a chapter 13 bankruptcy, implies you have the ability to pay the IRS in monthly instalments (either over a 3 or 5 year time period). Many people might go for a chapter 13 over an instalment agreement to avoid the penalties and interest they gather otherwise, which can be a real burden.
As for an offer in compromise, two things are taken into account when the IRS is deciding whether to allow it.
1. Amount of your future cash flow will be.
2. The value of your assets.
If these are above a threshold, they will not allow an OIC. Problems can arise here when the IRS doesn’t take into account certain ‘un-allowed’ expenses, meaning your cash flow is lower than they see it as.
So, when deciding whether to go for bankruptcy or OIC, you really need to think about your expenses and assets, and consider how the IRS is going relate these things to your ability to pay them.
