IRS – Bankruptcy Chapter 11
By Steven A Leahy
There are six things you can do if you owe the IRS money. First, you can simply write the IRS a check for the full amount. For many, that is simply not a realistic option. Often, if the tax obligation is not too significant, borrowing money from another source (friends, family, bank loan, credit cards, etc.) may be a less costly alternative than an installment agreement with the IRS. Second, you can enter into an Installment Agreement; pay the IRS over time. Third, you can obtain an Offer-in-Compromise: A lump sum settlement for less than the tax owed. Fourth, you can be declared Currently Not Collectible; pay the IRS nothing (for a period of time). Fifth, you can file for protection under the bankruptcy code. And the last option – you can do nothing, and let the IRS do what they will to you, your family and your assets.
This article addresses the fifth option – Bankruptcy. The Bankruptcy Code is found in United States Code: Title 11. Think of the Bankruptcy Code as a book, and like other books, it is divided into chapters. That’s why you hear so much about Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, or Chapter 15. Each chapter has a different remedy for a different situation. Chapter 7 is titled “Liquidation,” Chapter 9 “Adjustment of Debts of a Municipality,” Chapter 11 “Reorganization,” Chapter 12 “Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income,” Chapter 13 “Adjustment of Debts of an Individual with Regular Income,” and Chapter 15 “Ancillary and Other Cross-Border Cases.” Generally, individual taxpayers rely on Chapter 7, Chapter 11 or Chapter 13.
This article will focus on the Third kind of bankruptcy available, IRS Bankruptcy Chapter 11 “Reorganization.” People and businesses who file bankruptcy are referred to as “Debtors.” Generally, Chapter 11 of the bankruptcy code is used by businesses to reorganize. But, Chapter 11 is sometimes used by individuals who are not eligible for Chapter 13 protection.
Individuals may not be eligible for Chapter 13 protection if their debt is too high. Under section 109(e) of the bankruptcy code, in order to be eligible for Chapter 13 an individual’s unsecured debt may not exceed $388,175.00 and/or secured debt may not exceed $1,149,525.00. The eligibility numbers are adjusted every three years to account for inflation. The next adjustment is scheduled for April 1, 2016. In addition, stockbrokers and commodity brokers are not eligible for Chapter 13 protection.
Corporations, Limited Liability Companies and Partnerships are not eligible for Chapter 13 protection, because Chapter 13 is designed for “individuals with regular income.” Chapter 13 is available for sole proprietor businesses, as long as they meet these debt requirements.
Generally, the goal of Chapter 11 Debtors is to restructure and negotiate debts with creditors and work out ownership interests in order to continue operating the business and make the business profitable. This is accomplished by devising a plan of reorganization. A successful Chapter 11 reorganization is best for the Debtor and the creditors – because the Debtor business continues and creditors receive a greater distribution from the plan as payment of the debtor’s pre-bankruptcy debts than through liquidation of the debtor’s business (Chapter 7 Bankruptcy). In most Chapter 11 cases, the Debtor remains in control of the business and its assets as a “Debtor in Possession” (DIP). However, if the court believes that it would be in the best interest of the creditors and the bankruptcy estate, the court may appoint a trustee. In that case, the trustee is in control of the business and not the DIP.
IRS Chapter 11 Bankruptcy works well for companies facing payroll tax issues. Often, the IRS will demand repayment is a relatively short period of time, or close a company down. Chapter 11 bankruptcy may give the company the time necessary to restructure debts, focus the company resources on paying back payroll taxes, instead of unsecured debt, and allow a greater period of time to pay the taxes than the IRS will offer.
There is a down side. Chapter 11 Bankruptcies are complicated, and requires lots of planning and legal work – so it can be VERY expensive. Unlike Chapter 7 or Chapter 13, creditors, especially the largest creditors, have a voice in developing the plan. Also, Creditors are allowed to oversee the business operations and raise concerns throughout the case.
Tax issues in bankruptcy are complicated. This is just a general overview. If you owe the IRS and are unable to pay the full tax obligation immediately, bankruptcy may be your best option. Never hire a firm to help you with your IRS problem unless the firm is experienced in helping taxpayers use the bankruptcy code to protect them from the IRS. Before you do anything, you should give me a call. We can discuss your all your options. Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.