It is not unusual for my clients to find themselves indebted to two masters – the IRS and credit card companies. Both want a piece of the pie, but there is not enough to go around. So who do you pay first? How do you make both go away?
The IRS comes first. Here’s why:
1. Unpaid credit cards can be annoying – harassing debt collectors calling for money. But it is important to remember that credit card companies and debt collectors cannot take your wages, bank accounts or property. That can only be done by the filing of a lawsuit, which the debt collector cannot do (they are not lawyers). Once we are retained, the debt collectors are directed to confirm that all calls are to be directed through our office, which they are obligated to follow by law.
2. The only restriction that the IRS has in taking your wages or bank accounts is to issue a notice of intent to levy to you first. And have you ever seen a debt collector appear at your home or business demanding payment like the IRS does?
3. In legal terms, IRS taxes are considered priority debts, while credit cards are categorized as lower unsecured general debts. That means credit cards can be readily eliminated in bankruptcy. Taxes can be eliminated in bankruptcy too, but the rules for taxes are much more stringent because of their “priority” status.
No one sets out to file bankruptcy, but when the IRS and credit card companies compete for limited cash, bankruptcy is often the complete solution. A Chapter 7 bankruptcy eliminates the credit cards and older taxes if your budget does not permit monthly payments. If you can pay a little bit back, a Chapter 13 can be the answer. Chapter 13 is a debt reorganization, where bankruptcy law determines who gets your cash flow. It divides the pie by law, so you do not have to. Chapter 13 can also stop the accrual of credit card interest and IRS penalties. Anything you cannot afford to repay is eliminated by bankruptcy law.