Drowning in Debt? Bankruptcy May Be Your Best Option

A lot of folks contact my office to discuss their IRS tax problems, and then once we talk, I find out that they have other financial problems as well

Simply put, not every person is a good candidate for a bankruptcy case.  If you have a lot of home equity for example, then you might not be a good candidate.

Remember that the IRS doesn’t care what your other debt problems might be.   They don’t care if you owe a lot in credit card debts.  They don’t really care if you are behind on mortgage payments.

A Case Study on How Bankruptcy Can Help

But here’s a recent case that I have handled, and it can show you how it helps to look at bankruptcy with a clear view.

Joe came into my office owing $75,000 in IRS back taxes.  He had struggled for several years on payment plans, but he had recently defaulted on an IRS Installment Agreement, and he came into my office to discuss his options.   After talking for a while, Joe told me that he was also $12,000 on his mortgage loan and that he was facing a foreclosure.  He was current on his car loan and only had 2 years left on it.   And that he also had about $12,000 in credit card debts.

I reviewed with him how a Chapter 13 bankruptcy filing could help him achieve 3 goals.  First, it would help him catch up on mortgage payments. The bankruptcy filing stops the foreclosure process, and would give him 5 years to catch up on his mortgage payments.   Second, after seeing that around $15,000 of his IRS debt was from older tax years, I told him that the old tax debt along with the credit card debt would be considered general unsecured, non-priority debt by the Bankruptcy Court.   As a result, we would be able to pay that debt pennies on the dollar and wipe out (“discharge”) it at the end of his case.

Any Chapter 13 payment plan must pay off all “priority debt” within 5 years, which in Joe’s case, meant that his IRS tax debt incurred within the past 3 years had to be fully paid within the 5 years.   As a benefit though, the IRS debt would not incur penalty and interest while in bankruptcy.

In sum, his total Chapter 13 monthly payment would enable him to keep his house, pay off his car and repay the priority IRS debt and wipe out the old IRS debt and his credit cards.

Joe did not originally want to file bankruptcy, but after reviewing all of the benefits, I explained to him that he would be able to keep all of his property and ultimately wind up with a fairly decent credit rating after his case was completed.  He was sold on the benefits, and has now been in his Chapter 13 case for around 18 months and is doing fine.

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