The Surprising Benefits: Break a Tax Payment Plan through Chapter 7

 Posted on March 19, 2025 in Chapter 7

It is a common problem. You owed income taxes a year or two ago when you sent in your tax returns. Money was very tight so you could not just pay it off. You found out that the Internal Revenue Service lets you pay that unpaid tax through a monthly installment plan. So you set up the payment plan with the IRS. But your financial situation only got tighter because now you had a new monthly obligation you absolutely had to pay.

Now you are struggling to pay the monthly tax payment along with your living expenses and other debts. You wish there was a way to get out of your IRS monthly tax payment and other debts. The good news is that if a significant portion of your debt is an IRS monthly payment plan that you cannot afford, Chapter 7 bankruptcy may help. An experienced New Braunfels, TX bankruptcy attorney can provide guidance on using Chapter 7 bankruptcy to get out of an IRS payment plan you cannot afford.

What Is an IRS Payment Plan?

The IRS offers payment plans that allow you to pay the taxes you owe over an extended period. There are either short-term payment plans that give you 180 days to pay, or longer payment plans called installment agreements that give you up to 72 months to make the payments.

Potential Consequences of Breaching an IRS Payment Plan

Tax debt can add up, even if you have entered into an agreement to repay that debt with the IRS via a payment plan or installment agreement. Whether you arranged to withhold less from your paycheck during the current year or are self-employed and did not estimate enough quarterly taxes, being hit with a new year’s worth of income taxes could mean that you may not be able to immediately pay this new debt.

If you stop making payments, this would likely be considered a breach of your current payment plan with the IRS. At that point, the IRS could terminate the monthly payment agreement. It could then take aggressive collection action against you, which is something you want to avoid. Alternatively, the IRS might let you roll the new tax owed into your current installment agreement. But that would likely result in an increased monthly payment, which would only aggravate the problem of having more debt than you can handle. Even if you could afford to pay an increased monthly tax installment payment, the tax interest and penalties would add significantly to the amount you have to pay, leading to a vicious cycle of debt.

Chapter 7 Discharge of Tax Debts

Whether Chapter 7 is the right option to discharge your debt will largely depend on whether your older income tax debts are "dischargeable." This means whether the taxes can be legally or permanently written off in bankruptcy.

Dischargeable Tax Debts under Chapter 7

In most cases, only certain types of federal income taxes are dischargeable. Typically, a certain amount of time must pass from when the tax return was legally required to be submitted, and since the tax return was actually submitted. In addition, the following conditions must be met:

• You did not commit any fraud or willfully fail to pay taxes.

• You pass the "240 days" rule, which means that the IRS charged you the taxes at least 240 days before you filed for bankruptcy. This deadline can be extended if the IRS suspended collections when it was, for example, negotiating an installment plan with you.

• You filed a tax return for the return you want to discharge at least two years before filing for bankruptcy.

If you meet these conditions, the tax debt is generally dischargeable.

Tax Debt That Is Not Dischargeable under Chapter 7

In addition to tax debt that does not meet the above criteria, other types of tax debt are not dischargeable. An IRS tax lien, in which the IRS places a lien on your property before bankruptcy, is not dischargeable. Additionally, the non-dischargeable tax debt that you charged to your credit card to pay off the debt would also not be dischargeable through Chapter 7. However, in this case, the credit card company has to affirmatively challenge the dischargeability of the debt through a process known as an adversary proceeding in bankruptcy.

When Chapter 7 Makes Sense

If all the tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You would not have to pay anything anymore on that monthly payment plan. If you anticipate owing new taxes with your next tax returns, you could likely enter into a fresh monthly payment plan for these taxes. You would not end up breaching your present payment plan because you would no longer owe anything on it.

If only some of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 may still make sense. You would no longer have to pay that part of your taxes, which would presumably reduce your monthly tax payments. If that reduced amount is something you can afford—especially after discharging all or most of your other debts—Chapter 7 would help enough to justify using this tool.

Can You Restart Your Tax Payment Plan After Bankruptcy? 

If you eliminated most (but not all) of your tax debt in bankruptcy, the IRS may allow you to reinstate the payment plan, but it makes this determination on a case-by-case basis. When you file bankruptcy, your installment agreement will be suspended. After discharge, if you have outstanding debt with the IRS, it will review your case and inform you of the status of your installment plan.

What If Chapter 7 Is Not Right for You?

In some cases, Chapter 7 is not the best option for discharging your tax debt. If you cannot discharge all (or most) of your income taxes through Chapter 7, there may be other options such as a Chapter 13 "adjustment of debts," but an experienced attorney can advise you on whether that is the preferable course of action in your case.

Call an Experienced New Braunfels, TX Chapter 7 Bankruptcy Attorney

When you have significant tax debt, you can feel stuck in a vicious cycle of payments and obligations. It does not have to be that way. An experienced Schertz, TX bankruptcy attorney can review your case and advise you on whether filing Chapter 7 bankruptcy can be a way out of your IRS installment agreement. At Law Offices of Chance M. McGhee, attorney Chance McGhee helps clients with IRS tax debt get back on their feet. Call the office at 210-342-3400 for a complimentary consultation.