Don’t assume that just because your income taxes are too new to be written off that 1) bankruptcy can’t help, or 2) only Chapter 13 can help.
Even if none of your taxes can be discharged (written-off), or most of them can’t be, a Chapter 7 bankruptcy may STILL set you up so you can deal with those taxes in a constructive way. You may not need the extra expense and time of going through a three-to-five-year Chapter 13 case.
Clean Your Slate of Other Debts So You Can Pay Your Taxes
So the simple-to-ask, maybe not-so-simple-to-answer question is: will a straight Chapter 7 bankruptcy will help you enough? More precisely, after your Chapter 7 case was done, leaving you with tax debt, would you reliably be able to make large enough monthly payments on that tax debt so that it would be paid off safely and in a reasonable time?
“Safely” alludes to the fact that you would no longer have protection from your creditors—including your tax creditor(s)—after the three months or so that your Chapter 7 will usually take to complete. So after that you’d be on your own dealing with the IRS/state. That’s OK if you are confident that you would be able to make consistent monthly installment payments at the required amount, all the way through until it would be paid off. Chapter 7 is a good idea if you don’t need one of the most important benefits of a Chapter 13 plan—the continuous protection from creditors that you get throughout the payment process. That’s especially valuable if your circumstances change and you need to lower your payments. At that point you’d probably not want to rely on the flexibility of the IRS, or the state (which are often more rigid than the IRS).
“Reasonable time” refers to the fact that the IRS and state agencies, in almost all circumstances, will continue adding interest and penalties throughout the time you are making installment payments. Even if they are relatively flexible about stretching out the payments, you need to look at how much the ongoing interest and penalties will add to the amount you must pay before you’re done. In a Chapter 13 case, usually no additional interest and penalties get tacked on once the case is filed, which can save a lot of money if you owe a lot of non-discharged taxes.
So how do you know whether you will be able to make tax installment payments safely enough and large enough to pay off the tax debt(s) in a reasonable time?
First, it means calculating how much a Chapter 7 case would help your monthly cash flow and your longer term financial stability by discharging your other debts. And as a result, how much could you reasonably afford to pay towards the month tax installment?
Second, you need to know what the IRS and/or state tax authority will likely accept as your monthly installment, given the amount of your remaining tax debt and other financial information. From there the amount of additional interest and penalties can roughly be calculated.
Your bankruptcy attorney will help you with these projections and calculations. He or she will then advise you about whether you are a good candidate for cleaning your slate with Chapter 7 and then paying your remaining tax debt directly.