Posted by LWM Team on Thu, Sep 09, 2010
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.
Posted by LWM Team on Mon, Jul 26, 2010
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A Chapter 13 may be the answer if your tax debts aren’t eligible for a Chapter 7 solution.
Fundamentals of Chapter 13 Bankruptcy
Most tax payers holding tax debts choose Chapter 13 for bankruptcy. An offer for a monthly payment plan is made to the Bankruptcy Court. If the court approves you are responsible for making monthly payments to a trustee appointed by the court. The trustee shares out the money to your creditors as well as the IRS. Such a payment plan remains in operation for five years.
Taxes Paid in a Chapter 13 Plan
You are obliged to pay secured taxes in full. This is if you have a recorded lien and property with a present value the same as the tax lien. When this is paid the lien is no longer attached to your current property or upcoming property.
Additional Motives Why Chapter 13 is Advantageous:
The IRS is forced to accept a repayment plan. The IRS may only take what the bankruptcy judge endorses. Chapter 13 ensures property and wages may not be seized and recollection procedures may no be resumed by the IRS. If a revenue officer refuses to allow an evenhanded payment plan then Chapter 13 is a means of bypassing this obstacle.
As soon as you file for Chapter 13 all penalties and interest cease accruing but not on secured taxes. On the other hand, an IA (Installment Agreement) agreed to by the IRS keeps on accruing late payment penalties and interest. Tax penalties are handed out at the discretion of the bankruptcy judge.
Becoming Eligible for Chapter 13 Bankruptcy
To find out if you qualify for Chapter 13 you must reveal your liabilities, expenses, assets and income by completing a set of forms. In addition, all your tax returns from four years before the bankruptcy must be filed. You are also obligated to present a proposed payment plan.
Once you have all of the above you can present it to the bankruptcy judge who assesses your request and assigns a trustee to watch over your case. All your creditors may attend a meeting to oppose your plan. This hearing is set up by the assigned trustee. It is not usual for the IRS to oppose a Chapter 13 request.
It is possible for the judge to make revisions to your plan but if your forms are in order it will be permitted. Your sixty monthly payments go to the trustee who pays your creditors on a pro rata basis.
Posted by LWM Team on Thu, Jul 22, 2010
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Filing for bankruptcy can do away with or lower tax debts. On the other hand, it can force the IRS to accept a payment plan or it can simply get you more time. Bankruptcy could be the means to lessening your tax woes but make sure you are aware of any recent changes to the laws governing bankruptcy.
Bankruptcy Categories
Bankruptcy should be seen as a lawful procedure. It can be used to organize and resolve debt problems. It slots in tax debt. In this case you file an appeal with the Federal Bankruptcy Court. There are two kinds of bankruptcies:
- Chapter 7 i.e. Straight Bankruptcy – an insolvency of debts, it can waive all or some of your income taxes.
- Chapters 11, 12 or 13 i.e. Repayment Plans – permit payment of debts and tax debts over a time period of that is extended and frequently pay less than you owe.
The Automatic Stay
There is a lawful safe haven known as the automatic stay. This is halts all creditors and collectors as well as the IRS as soon as you file for bankruptcy.
If a creditor wants to collect during a bankruptcy case he must get a removal, lift or stay from the bankruptcy judge. It is very seldom the IRS makes such an application.
Bankruptcy Negatives
There is a downside to consider before filing for bankruptcy:
Additional Time for IRS to Collect
If not all your tax debt is removed after bankruptcy the IRS gets additional time to collect the outstanding monies owed by you. Ten years is the usual time they have to get interest, penalties and tax bills from you. When your time of bankruptcy has ended, the remaining time of the initial ten years for collection has the pending period of your bankruptcy case added on for the IRS.
Your Credit Rating and Tax Liens
When you file for bankruptcy it is in the public record and it shows on your credit history for ten years.
If the state taxing authority or the IRS documented a tax lien notice it harms your credit report. However, a bankruptcy filing does prove you are attempting to sort out your debt troubles.
Posted by LWM Team on Thu, Jan 07, 2010
Many taxpayers consider bankruptcy with the intent of being released from their tax debt. Tax relief may be thought of by some as motivation for bankruptcy, but going through with filing should be avoided if at all possible. When using bankruptcy as a form of tax relief, there are some essential facts that should be understood.
Filing for bankruptcy is one option for alleviating tax debt; however, it is not recommended. Taxpayers who are considering Chapter 7 bankruptcies should be sure they have all of the facts before doing so. Your odds of being released of your tax debt through a Chapter 7 can-in reality-be rather slim, not to mention that this is a rather costly method of eliminating tax liabilities. This route should be your absolute last resort after exhausting any and all other options available to you; in other words, "Plan Z" on your list.
Filing a chapter 13 bankruptcy is also a method that should be used as a last resort. With a Chapter 13 bankruptcy, the IRS can work out a payment plan for taxes owed. With this action, debt owed to the IRS is never forgiven, just delayed through a long series of painstakingly extended payments. Not only is bankruptcy in any form less promising than other more moderate tax relief methods, but it can also ruin your credit. On the other hand, if you have serious credit issues already, you may see no harm in filing bankruptcy.
You must understand that bankruptcy was not designed as a bandage or cure for tax issues. Certain laws allow the IRS to collect on back taxes even if a bankruptcy is in effect. It is all quite complicated, even when broken down into layman's terms. Tax relief is one of those areas that you do not want to guess on. One wrong move could leave you in a worse situation than the one you were initially trying to get yourself out of.