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There are many ways to lower your debt if you’re struggling to stay afloat financially. Two methods include personal bankruptcy, a legal process which is designed to reduce or eliminate certain debts, and “offers in compromise” (OIC), which are available through the Internal Revenue Service (IRS) for eligible individuals. While both can drastically reduce an individual’s debt burden, bankruptcy and offers in compromise are very different procedures with many crucial distinctions. If you live in Pennsylvania and need help getting debt relief, keep reading to hear Philadelphia bankruptcy attorneys explain some key differences between filing for bankruptcy and settling your tax debt with an OIC, with hints about which method may be right for you.

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What is an Offer in Compromise (OIC) with the IRS?

An “offer in compromise,” or OIC, is a financial arrangement in which the IRS allows an eligible taxpayer to settle his or her tax debts for a lower amount than what the taxpayer actually owes. If you owe a tax debt to the IRS, an OIC may help you save money by reducing your payments or giving you more time to pay. If you meet the IRS’ eligibility requirements, which our Bucks County bankruptcy lawyers will discuss in just a few moments, you may want to consider extending an offer to lower your tax payments.

To quote the IRS, “We generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time.” In other words, the IRS is likely to approve an OIC if it is determined that your offer matches what the IRS believes it would have been able to collect from you. On average, the IRS accepts roughly four out of every 10 offers, with minor fluctuations from year to year. The IRS accepted approximately 38% of the offers received in 2012, approximately 42% of the offers received in 2013, and approximately 40% of the offers received in 2014.

If you qualify for an OIC, an attorney can guide you through the IRS paperwork and help you calculate a reasonable offer. The IRS offers a free online screening tool that can help you determine whether you are eligible. Be advised that you will not be eligible for an OIC if any of the following statements are true:

  • You have not already paid the estimated tax required of you.
  • You have not filed all of your federal income tax returns.
  • You run a business, have employees, and have not submitted all federal tax deposits which you are required to submit.
  • You are currently going through the Pennsylvania bankruptcy process.

This last point is especially critical if you are considering bankruptcy as a possible alternative to an offer in compromise. Whether you file for bankruptcy in Bucks County, Delaware County, or other counties of Pennsylvania, you will not be eligible for an OIC until your bankruptcy is over, which may take months or years depending on whether you file Chapter 7 or Chapter 13. Before you commit to either decision, be sure to discuss your options in depth with an experienced bankruptcy alternatives lawyer who can give you a clear and honest assessment.

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Bankruptcy vs. Offer in Compromise: What’s the Difference?

There are many differences between bankruptcy and OIC, including:

  • Documentation. For example, you must submit a bankruptcy petition when you file for bankruptcy, and must submit Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) when you apply for an offer in compromise. Keep in mind that many additional documents are required in both procedures.
  • Eligibility. For example, you are ineligible to file Chapter 13 if your secured debt exceeds the current threshold of $1,184,200. This standard is absent from the OIC eligibility requirements.
  • Payments. An OIC requires you to make a lump sum cash payment, or payments in monthly installments. Chapter 13 bankruptcy requires monthly or biweekly payments for three to five years, and Chapter 7 does not require any monthly payments at all, focusing instead on asset liquidation.
  • Venue. Bankruptcy cases are handled by bankruptcy courts, such as the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, with input from bankruptcy trustees, creditors, and other parties. Offers in compromise are handled through correspondence with the IRS.

While these are all important distinctions, the most significant difference between bankruptcy and OIC is arguably that each procedure affects different debts. Offers in compromise exclusively reduce tax-related debts, whereas bankruptcy is broader in scope and can reduce or wipe out all of the following debts:

  • Business debts
  • Credit card debts
  • Debts you owe your friends and family for personal loans
  • Medical debts from hospital bills and other expenses
  • Past-due rent and utility bills

Similar to an OIC, bankruptcy can also help you reduce what you owe to the IRS. However, on this point, bankruptcy may be less flexible than an OIC. The only type of tax debt that can be reduced or eliminated in bankruptcy is income tax debt, while an OIC may also allow the taxpayer to settle back payroll taxes under the appropriate circumstances.

On the other hand, bankruptcy has some additional advantages that an OIC does not. For example, filing bankruptcy will immediately grant you the powerful protection of the “automatic stay,” which places a temporary freeze on debt collections while your bankruptcy case is pending.

Philadelphia Bankruptcy Lawyers Can Help Reduce Tax Debt

It is difficult to say whether bankruptcy or an offer in compromise is “better” for reducing debt, because the answer ultimately depends on your financial circumstances. However, if you have significant debt from sources other than taxes, bankruptcy is probably the more effective approach. Both procedures can have pros and cons, and both must be carefully executed for maximum debt relief.

Before you start preparing your offer, or begin the process of filing for bankruptcy, compare your options in depth with the Montgomery County bankruptcy attorneys of Sadek and Cooper Law Offices, LLC. We handle Chapter 7 cases, Chapter 13 cases, and various alternatives to bankruptcy for residents of Bucks County, Delaware County, Montgomery County, Philadelphia County, and the Southeastern Pennsylvania region. For a free legal consultation, call our law offices today at (215) 995-2543.