Depending on the age and nature of your tax debt, bankruptcy may be an advantageous alternative to an Offer In Compromise with the IRS. Being in debt can be a very difficult situation to deal with. Even more so when one of your major creditors is the IRS. Deciding which bills to pay, which bills to ignore, watching late penalties and interest accrue, have all become part of your daily routine. At some point, you have to say “enough is enough” and explore some alternative options. We’ve presented some options and explanations in this article regarding offers in compromise and the various bankruptcy chapters. If you’d like a free consultation or have an additional question you should give us a call or make a contact form submission.
How does the Offer in Compromise (OIC) work?
An Offer in Compromise is a mechanism for settling your tax debts with the Internal Revenue Service. The IRS has established the Offer in Compromise as a way to accept lump-sum payment. Or, a payment plan that is less than the full amount you owe if you meet certain criteria. Because tax debts can expire (under the statute of limitations), the IRS may be willing to accept a partial payment; if you can’t pay the whole amount before the statute of limitations expires. Depending on how much you owe, this might save you hundreds or thousands of dollars.
How does Bankruptcy Work?
Bankruptcy permits people who are drowning in debt to discharge it in a way that is reasonable for their income and under the supervision of government-appointed attorneys and trustees. As part of the bankruptcy procedure, the debtor must complete credit counseling, file a petition with schedules and statements, and attend a meeting with the court-appointed bankruptcy trustee. The Automatic Stay protects the debtor from creditors as soon as filing of the bankruptcy petition happens. And, it continues to do so until the case gets discharged or dismissed. Chapter 7 and Chapter 13 are the two most common versions of consumer bankruptcy filings. Each has its own set of advantages and disadvantages, as well as eligibility qualifications.
What’s the Difference Between Ch. 7 and Ch. 13 Bankruptcy?
Most bankruptcy cases filed in the United States are filed under Chapter 7. Furthermore, they can best be summed up by the image of the Monopoly man with his pockets turned inside out. Most unsecured obligations, including credit cards, medical bills, and personal loans, are discharged under Chapter 7. This process usually takes 4-5 months from start to finish. However, because of certain qualifications and exemption limits, many debtors are unable to file Chapter 7 bankruptcy. Depending on the person’s assets, income, type of debt, and goals, a Ch. 13 may be necessary or preferable.
On the other hand, a Ch. 13 (commonly referred to as a wage earner’s bankruptcy or “debt consolidation on steroids”) reorganizes and reduces debts into a monthly payment plan based on the filer’s ability to pay. There will be either a 3 or 5-year payment plan, depending on the debtor’s household income level or preference. In Chapter 13, unsecured debts are typically discharged with only a small fraction having been repaid in the plan. It also provides debtors an opportunity to “cure” or catch up on delinquent car notes or mortgages.
When is an Offer in Compromise better than a Bankruptcy?
When the IRS makes up all or most of your total debt, an Offer in Compromise may be the better option.
The most important question to answer is whether or not your IRS debt can be discharged in bankruptcy. In order for taxes to be discharged in bankruptcy, the debt must meet certain conditions. For example, the tax year of the debt you are discharging must have come due at least 3 years before the bankruptcy filing and you must have filled the return at least 2 years before the bankruptcy filing. Also, any determination of fraud will prevent tax debts from being discharged in bankruptcy.
In short, if the tax debt is your only debt and you don’t meet the aforementioned qualification, then the Offer in Compromise is probably better than the Bankruptcy. However, if you have significant other debt, and those debts are dischargeable, then bankruptcy may be a more efficient option to resolve your tax and other debt.
When Is Chapter 7 Bankruptcy Better than an Offer In Compromise?
Bankruptcy cases filed under Chapter 7 have a lot of advantages. Many people file Chapter 7 after a medical emergency, divorce, or other financially challenging situation, taking advantage of the large amounts of debt that can disappear. Tax debts described above may also get forgiveness under Chapter 7. If you qualify based on the income threshold, have sufficient dischargeable debt, and do not stand to lose unexempt assets, then Chapter 7 is probably a good option for you. However, Chapter 7 is not available to everyone, and it has several limitations.
Relatively high income is one circumstance that can disqualify you from filing Ch. 7 bankruptcy. You must use one of two methods in order to demonstrate that you meet the income requirements for Chapter 7 bankruptcy. The first is to compare your income to the state’s median income based on the number of family members living with you under one roof. If your income is not stable or consistent, your average monthly income for the previous six months will be used instead. Chapter 7 bankruptcy is available to anyone who earns less than the state median income. Otherwise, you’ll have to use something called the “Means Test” to determine qualification based on income.
To do the Means Test, you must first determine your average monthly income over the previous six months.
Then, from your average gross monthly income, you’ll deduct certain mandatory expenses (such as tax, union fees, etc.). Your discretionary monthly income is the money left over. You will be eligible for Chapter 7 if this amount is negative or falls inside a particular range dependent on your family size.
Assets and exemptions are the final and often most important factors in determining whether Chapter 7 is a good fit. You must use exemptions in order to preserve your assets in Chapter 7. Otherwise, the trustee will be able to seize them and sell them to satisfy your creditors. In other words, you may qualify for Chapter 7 based on the other factors. And, unexempt assets will not disqualify you. But, you have to understand what you must surrender before moving forward. Check with a local bankruptcy lawyer to see which of your assets will get protection in a Chapter 7 bankruptcy.
When Is Chapter 13 Bankruptcy Better than an Offer In Compromise?
A Chapter 7 bankruptcy may not be an option if your income is too high or if you have unexempt assets you can’t lose, such as vehicles or real estate. If you are behind on payments for these assets, Chapter 13 will make it easier for you to catch up. While you are current on your plan payments, your arrears will spread out over 3 or 5 years, and you will have protection from foreclosure and repossession. If you have co-signers on your loans who would be held liable if you declared Chapter 7, Chapter 13 may be preferable as well. Chapter 13 includes additional benefits that Chapter 7 does not; the ability to discharge junior liens on real estate.
If you’re unsure about which bankruptcy chapter to choose, call a local bankruptcy attorney for advice.
Can I Use BOTH the Bankruptcy AND the Offer in Compromise?
It may make sense in certain circumstances to use an offer in compromise after you’ve discharged your debts in bankruptcy. Even if your tax debt is not dischargeable in bankruptcy, it may be a good idea to file the bankruptcy in order to discharge your other unsecured debt in order to make the non-dischargeable tax debt more affordable to pay. A bankruptcy lawyer can help you figure out if this strategy makes sense for you.
Don’t Procrastinate! Make an appointment for a free debt evaluation with our bankruptcy attorney today.
If you’re struggling with a tax debt you should contact us right away. Mr. Fleysher has helped clients throughout Broward, Palm Beach, Martin, Saint Lucie, and Indian River Counties file thousands of successful bankruptcy cases. It’s always better to have an experienced Florida debt relief attorney on your side when navigating your way out of debt and into a Fresh Start.
Do you have any other questions about an offer in compromise or bankruptcy? With your FREE consultation, our experienced bankruptcy lawyers are ready to assist you in making this decision! We provide skilled representation with payment plans that fit your budget; you may even be eligible for a $0 down filing. Get started with your free consultation today by calling or filling out our online form.