Behind on credit cards and have IRS tax debt: When there’s not enough to go around
Owing just credit cards or just the IRS is a heavy load.
But what if you are strugglng with credit card debt and have fallen behind on your taxes, and are understandably sinking under their combined weight?
For a while, it may be manageable – the IRS sometimes takes a while to rear its ugly head, and you can buy a little time by paying the credit cards a little every month and keeping them off your back.
But the monthly credit card payments get you nowhere – despite the good money you are throwing their way, you hardly make a dent in the balances.
And then the IRS come calling. A local Revenue Officer pays you a visit at home or work, or maybe your bank account or wages are garnished, it could even be the onslaught of IRS collection letters filling your mailbox.
And you find out that the IRS really does not care about your credit card problem. The payments you are sending to the credit cards, well, the IRS tells you to send that to them, or they will garnish your accounts. In debtor-creditor law, the IRS is often considered a preferred creditor, meaning that they have a right to get paid before the credit cards.
Your house of cards is crumbling. If you pay the IRS what they want, then the credit card companies are going to start dunning you – calls, letters, third-party debt collectors, threats of lawsuits from lawyers.
There are solutions to slay this two-headed monster.
First, if you owe the IRS under $50,000, they will give you a 72 month payment plan on your taxes and not inquire about your credit card debt. The IRS will not ask you to send the credit card money to them if you can afford to repay the taxes over 72 months. In fact, the IRS won’t even ask you for financial disclosures of where you work, what you drive, how much your house is worth, or if you even have credit card debt. The IRS offers this as a simplified method to repay your taxes. It is called a direct debit installment agreement.
If you owe the IRS more than $50,000, they will still give you a 72 month payment plan, but they will require a full financial disclosure about your income, expenses, assets, and debts. If it appears that you have enough cash flow to repay the IRS over 72 months, they will give you the payment plan and again not require you to stop paying the credit cards even though they know about it.
The key key to these options is the ability to pay the IRS over 72 months while still having room left over in your budget for the credit cqards. The primary difference is ease of entering into the agreement with the IRS: balances under $50,000 can be done with a phone call, while to get a 72 month plan for balances greater than $50,000 require a more lengthy and detailed negotiation.
What if you can’t afford the 72 month plan with the IRS while keeping up with the credit cards?
That’s where bankruptcy may become a necessary evil.
A Chapter 13 bankruptcy allows you to reorganize the way your creditors are paid. In other words, bankruptcy law can force the credit card companies to take less than what they are owed, freeing you up to pay the IRS. And sometimes, you can even use a Chapter 13 to also force the IRS to take a haircut and accept less than what they are owed. IRS guidelines requiring you to pay them, not the credit cards, go out the window and are replaced by bankruptcy laws that permit you to give a little to each.
Chapter 13 bankruptcy laws allow you to force everyone to play nice and split the pot.
Another benefit of Chapter 13 bankruptcy is that all collection action stops once it is filed – harassing phone calls, collection letters, IRS fears, all go bye-bye. You get peace. That applies to credit cards and the IRS equally.
Owing credit cards and the IRS is certainly no fun. But knowing the options available can set you on a path to get your life back.