The reason is obvious. There can be significant benefits to filing bankruptcy.
6 of the most important potential benefits are as follows:
1. The Automatic Stay
“Automatic Stay” is the common term used to describe that section of the bankruptcy code that governs what creditors must do or stop doing, once a bankruptcy is filed. It applies in every bankruptcy case. This law requires that almost every creditor in almost every situation, stop collection activity once the case is filed. This includes the IRS.
If the IRS has proper notice of the bankruptcy, the filer can actually sue the IRS for violation of the Automatic Stay Provision and recover actual damages including court costs and attorney fees, if the automatic stay provision is violated.
2. Elimination of Tax Debt after Discharge
The most obvious reason to file the bankruptcy, is the ability to get rid of the debt. As I often say, “believe it or not” certain income tax debts can be wiped away in bankruptcy along with accumulated penalty and interest. Determining “dischargeability” can be more complicated than it seems. Use of experienced legal counsel is a must.
3. Threat of Bankruptcy in an Offer in Compromise
A good bankruptcy candidate may be able to use threat of bankruptcy to obtain a better offer in compromise without ever having to file. The key? A good bankruptcy candidate and experienced legal counsel.
4. Force payment plan
In a chapter 13 bankruptcy a payment plan can be forced on the IRS, if the IRS won’t agree to a better and more reasonable payment plan outside of bankruptcy
Whether the plan is approved is not up to the IRS, but decided by bankruptcy law and the bankruptcy judge.
5. Deal with all other debt at same time
Most with serious tax debt have other debt problems as well. Credit card debt, medical bill debt, foreclosure issues, business related debt etc. etc.
A bankruptcy, chapter 7 or 13 depending on which best fits, can deal not only with the tax debt but also with these other problems, via discharge, cramdown, or payment.
6. Re-determination of Taxes Due
The bankruptcy code allows the Bankruptcy Court to redetermine the amount of tax owed.
Bankruptcy can be used to determine the amount of the debt even if you lost the argument in tax court.
If you have serious tax debt, you should talk to an attorney experienced in the relationship between tax debt and bankruptcy in order to find the best solution to the problem.