Tax Debt Solutions Blog

Tax Relief: Using the Bankruptcy Code to Halt the IRS

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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.