Tax debt is government debt, and government debts are not usually dischargeable at bankruptcy. Although there are some exceptions, it is very rare that we recommend bankruptcy as a viable option to our clients. If we do, it is the absolute last resort. Many people do not realize the long-term, serious consequences of filing for bankruptcy. In fact, I have heard some refer to bankruptcy as an easy way out of paying back their IRS tax debt, but that could not be farther from the truth.
To begin with, bankruptcy remains on your credit report for seven years, making it nearly impossible to access any credit during that time. Moreover, even after those seven years, bankruptcy can continue to have significant negative impact on your chances of receiving credit. One of the most important questions asked on any loan application is “Have you previously filed bankruptcy?” Checking off the ‘yes’ box may automatically deter your chances of getting approved for that loan as the lender may now consider you a high-risk customer. If you are approved for loans, expect low-borrowing limits and steep interest rates. I say all of this not to discourage folks that have already filed for bankruptcy, but to warn those that perceive it as an easy fix. As I mentioned, there are exceptions to the rule, and for some it may be the only option available. However, I genuinely believe that there is hope for the majority of people who owe the IRS with resorting to such drastic measures.
There are many options offered by the IRS to make even the most insurmountable amount of tax debt easier to manage. These options include partial payment installment plans for taxpayers that can show they are unable to pay back their debt. You can also apply for non-collectible status with the IRS, where you’re basically paying off the portion that you can afford to and the rest of the balance is deemed non-collectible. And after a certain period of time, the IRS may end up wiping it away, no longer leaving a need to file for bankruptcy.
In my many years of practice, there has only been one client who I advised bankruptcy, and it was a very specific case. His business had a large amount of back taxes, it was also poorly managed, and had incurred a lot of other debt as well. After reviewing the situation, I determined he had two options, and neither of them were good. He could either 1) have his business file for bankruptcy or 2) Take on another investor and reduce his ownership of the business to 10% in hopes the new investor could turn the company around. However, I would like to make myself clear, this was a very specific and cumbersome scenario. Also, in this particular client’s case, it was his business that would file for bankruptcy, not him personally, which is very different. Moral of the story: don’t feel like bankruptcy is your only option because most of the time that is simply not true.
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