The IRS will garnish me for a tax debt. It's my only overdue debt. Should I file for bankruptcy?

Find out your options for dealing with overdue income tax debts.

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If income tax is your only debt, before you consider bankruptcy, determine whether you can use one of the IRS's many debt relief plans. If you can't take care of the debt outside of bankruptcy, then Chapter 7 or Chapter 13 bankruptcy might help. In Chapter 7, whether you can discharge the tax debt depends on how old the debt is. In Chapter 13, you can pay the tax debt back through your payment plan, and may be able to get rid of penalties and interest. Read on to get the details.

Non-Bankruptcy Options

If you owe income taxes to the IRS and want to avoid wage garnishment or other collection actions, you should fist consider some relief options offered by the IRS before filing bankruptcy. This is especially true if you don't owe any other debts.

Installment Payment Plan

If you are unable to pay the tax debt in a lump sum, you may be able to enter into an installment payment plan (IPP) with the IRS. With an IPP, you make a payment plan offer which, if accepted by the IRS, will stop all further collection action as long as you make the payments.

Get a Declaration that You Are Currently Uncollectible

If you cannot afford to make payments under an IPP, then you may be able to get the IRS to declare you as “currently not collectible.” You would have to prove a qualified financial hardship. If you are successful, the IRS won't cancel the debt, but it won't collect on it either. This is a temporary suspension of tax collection, and lasts until your financial situation improves. If it doesn't, then it is possible that the ten-year statute of limitations for IRS debt collection may run out, providing you more permanent relief.

Offer in Compromise

You may also be able to get the IRS to accept a suitable Offer in Compromise (OIP). OIPs are difficult to obtain and the process can be complicated. For more information about OIP's, read Using an Offer In Compromise to Settle a Tax Bill.

For more information on potential non-bankruptcy IRS tax relief, read IRS Back Taxes: Taxpayer Debt Relief Options.

If none of these options work for you, then it may be time to consider filing for bankruptcy.

Tax Debt in Chapter 7 and Chapter 13 Bankruptcy

If you have filed all of your required tax returns at least two years ago and the taxes were due at least three years ago, then you may be able to discharge the tax debt in a Chapter 7 bankruptcy. You do not need to have other non-tax debts to file Chapter 7 so long as you meet the other filing requirements. There are some specific time limits and other restrictions on discharging income taxes in Chapter 7. For more information, read Tax Debts in Chapter 7 Bankruptcy.

If you cannot file for Chapter 7 bankruptcy, then Chapter 13 bankruptcy may provide you with tax debt relief. You may have to pay the entire tax debt back, similar to an installment plan. However, unlike the IRS installment plan, you might be able to get rid of or reduce IRS penalties and interest. This could result in a much more manageable payment plan. For more information, read Tax Debts in Chapter 13 Bankruptcy.

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