Why Chapter 13 Can Be Better Than an Installment Agreement

Chapter 13 has several advantages over an installment payment agreement with the IRS.

  •  Interest and penalties stop.  With an installment payment agreement interest keeps accruing and the IRS is free to assess additional penalties.
  •  You may not have to pay all of your taxes.  This is complicated and depends on the nature of your taxes and your income.  It might also depend on the liquidation value of your bankruptcy estate.  But many times Chapter 13 debtors do not fully pay back all of their taxes.
  • In some cases the payments in a Chapter 13 plan are less than what the IRS will accept for an installment payment plan.
  • A Chapter 13 payment plan is only five years,and in some cases only three years.  The IRS has ten years to collect taxes, penalties, and interest–unless they obtain a judgment in which case they get up to twenty years to collect from the date of the judgment (assuming they renew the judgment after ten years which the IRS certainly can do in this state).
  • Other creditors may be discharged in a Chapter 13 bankruptcy.  Obviously, an installment plan with the IRS cannot do that.
  • The discharge of tax debts, if possible, is unconditional.  Later events, like not filing or paying taxes, do not affect the bankruptcy discharge.  Taxes handled by IRS payment plans and even taxes written off by the IRS through an offer-in-compromise can be revived if the taxpayer does something wrong after the fact.
  • Bankruptcy is a bit of a Jujitsu maneuver.   Instead of the IRS dictating what is acceptable to them, the bankruptcy court tells the IRS what they are going to get.  The balance of power shifts dramatically.
  • It usually is easier to predict the outcome in Chapter 13 than dealing with the IRS.  The bankruptcy process is rather mechanical if handled correctly, while dealing with the varied and mercurial personalities of IRS agents is more hazardous and unpredictable.
  • The discharge of debt in a Chapter 13 or Chapter 7 bankruptcy does not trigger income from debt cancellation.
  • If you are behind in your payments on  your house or car, Chapter 13 can give you time to get caught up.
  • Chapter 13 is a global solution to all of your debt problems, whereas dealing with the IRS only handles your tax debt.