Insider's guide to Bankruptcy: The IRS

Yes, we owe them money. In my wildest fantasies, we would have come into a large sum of money by now and just sent it off to the IRS to be free from this debt. But that, as you know, has not happened. Too bad. Instead, we've been trying to set up a payment plan.

Prior to our Chapter 7 hearing, we were looking into submitting an "Offer In Compromise." An offer in compromise (OIC,) as stated on irs.gov  is:

"an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer's tax liabilities for less than the full amount owed."

The paperwork is long and in-depth and there's no guarantee that your offer will be accepted. But, we figured it would be worth a try.

However, when you are "in bankruptcy" the IRS will not accept an OIC. I discovered this a few weeks ago when I sat down to tackle the OIC paperwork. That led to a series of phone calls where I discovered that when you are in bankruptcy, the IRS stops all collection of your debt.

Huh. We hadn't really expected this. Really? I needed to make sure. I probably spent a combined two hours on hold with the IRS over two days to make sure. Finally, the IRS verified for me that collection on our debt had, indeed, been stopped. Phew.

For now.

Until the bankruptcy has been closed. We'll know when that happens when we receive our "Letter of discharge." And according to our attorney, the banks are so behind we probably won't be getting that letter for about 7 months.

What does that mean? Well, it means we have a little breathing room. Time to save money. But, the catch is this: Interest is accruing. We're not sure what the % is at this point. That requires another phone call. We will need to get this number, though. Very important. Even though the IRS is not collecting on our debt, we will still be making monthly payments. How much is still to be decided.

Just thought you'd like to know.

And by the way, Reuters reports that personal bankruptcies are up 41% from last year. (This link is courtesy of Facing the Mortgage Crisis - St. Louis.)

I'm curious. Have any readers had any success negotiating with the IRS? Anyone out there submit an Offer In Compromise and have it accepted? Or declined?

Oh, and one more thing... only 10 days until we say goodbye to friends and family in Chicago, get back in the car and head northwest... to our new life on the island!