Bankruptcy Can Solve Your Debt Problems Even If You Can’t Write Off Every Debt

Posted by Kevin on April 3, 2013 under Bankruptcy Blog | Be the First to Comment

You owe the IRS a substantial amount of money for income taxes.   You have heard that bankruptcy doesn’t discharge (legally write off) income tax debts.   So you’re not seriously considering bankruptcy much less consulting with a bankruptcy attorney.

You may or may not be right about whether or not that income tax debt can be discharged now.  However, you may be able to discharge the income tax debt in the future .  But you will not know for sure unless you get some advice.  Here are six reasons why you should not be your own lawyer, and should consult with an experienced bankruptcy attorney:

1. Some debts, which you think can’t be discharged, actually can. Certain income taxes can be discharged in either a Chapter 7 or Chapter 13 case.  For the most part, it depends on when the tax obligation was incurred.   And even though alimony is not dischargeable,  there are some payments to an ex-spouse which are not considered nondischargeable alimony under the Bankruptcy Code.  It’s certainly worth finding out whether the debt you assume can’t be discharged actually can be discharged.

2. Some debts that can’t be discharged now may be able to be in the future. Almost all income taxes can be discharged after a series of conditions have been met. So your attorney can put together for you a game plan coordinating these tax timing rules with all the rest of what is going on in your financial life.

3. Even if you can’t discharge a debt, bankruptcy can permanently solve an aggressive collection problem. In many situations your primary problem is the devastating way a debt is being collected. For example, you may want to pay an obligation for back child support but the state support enforcement agency is about to suspend your driver’s and/or occupational license. A Chapter 13 case will stop these threats to your livelihood, and protect you from them while you catch up on the back support.

4. You have more control over the amount of the monthly payments on debts that cannot be discharged. Debts which the law does not allow to be discharged in bankruptcy also tend to be ones that give the creditors a lot of leverage against you. Chapter 13 takes some of this leverage away from them by allowing you to pay what your budget allows, not what these creditors would otherwise like to carve out of you.

5. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts are so much more difficult to pay off because a part of each payment goes to the ongoing interest and penalties. Some tax penalties in particular can be huge. Most of these ongoing add-ons are stopped by a Chapter 13 filing, allowing you to become debt-free sooner.

6. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have a debt or two that can’t be discharged and a bunch of debts that can be. Even if bankruptcy can’t solve your entire debt problem directly, discharging most of your debts would likely make that problem much more manageable. Under Chapter 7, you would be able to pay off those surviving debts much faster, which is especially important if they are accruing interest or other fees. And under Chapter 13 you would have the benefit of a predictable payment program, one that focuses your financial energies on those nondischargeable debts while protecting your assets and income from them.

So don’t let the fact that you believe that you have debts that can’t be discharged in bankruptcy stop you from getting legal advice.  What you find out may surprise you.