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Can bankruptcy help someone with massive tax debts?

On Behalf of | Nov 17, 2023 | Personal Bankruptcy

Bankruptcy is often an individual’s last line of defense before outright financial catastrophe. People often file for bankruptcy to stop creditor lawsuits or preserve their assets from repossession or foreclosure. Bankruptcy leads to a pause in collection activity and can result in the discharge of someone’s eligible debts if they successfully complete the process.

Many bankruptcy filers need financial relief because of medical debts or issues with credit cards. However, there are many other potential sources of overwhelming personal debt. For example, some people struggle with tax debt. Perhaps someone started working as an independent contractor and failed to retain money to pay their taxes throughout the year. Maybe they made a mistake regarding their withholding information for multiple subsequent years.

By the time the Internal Revenue Service (IRS) notifies someone that they have underpaid their taxes, the balance due could be far too much for someone to pay at once. They will likely need to deal with penalties and interest to cover in addition to the base amount of the taxes due. Can bankruptcy help people resolve their income tax debts?

Chapter 13 bankruptcy can help people regain control

For most people, tax debt is not eligible for discharge. Bankruptcy can eliminate some of their other debts but not their unpaid income taxes. However, Chapter 13 bankruptcy can still be useful for those with significant income tax debts.

The Chapter 13 bankruptcy process involves negotiating a payment plan with creditors. The IRS can play a role in that process. Individuals can potentially negotiate more favorable repayment terms when communicating with the IRS as part of a Chapter 13 bankruptcy instead of simply proposing a payment plan directly to the IRS.

The amount of someone’s income that they must dedicate towards the monthly payments may be more reasonable when the plan integrates all financial obligations, not just someone’s tax debts. Additionally, after they finish the repayment plan, the filer will be able to discharge the remaining balances on eligible debts, which can make it easier to continue paying toward any remaining amount due on their income tax debt.

Exploring less-common solutions for handling income tax debts may benefit those who are worried about their ability to pay the IRS what they currently owe. Seeking legal guidance can help individuals to explore which options will most effectively resolve their unique concerns.


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