Your credit card debt problems and your tax problems make one big problem, but the key to solving them may lie in looking at each one separately. There are different solutions for the tax debt and for the credit card debt, in most cases.
Your goal to 'wipe the slate clean' is a reasonable goal, but may be hard to achieve.
Solution 1: Bankruptcy
You mentioned bankruptcy as a possible solution. If it would wipe the slate clean, bankruptcy could be your best option, despite its strong, lingering effects on your credit. It is possible for both tax debt and credit card debt to be discharged in a Chapter 7 bankruptcy, but it is very hard to qualify for a Chapter 7 bankruptcy.
In order to qualify for a Chapter 7:
- You need to meet a strict means test for financial hardship. You have to fit within the narrow income and asset hardship rules, in order to qualify for discharging your debts through a Chapter 7.
- Your tax debt needs to meet these basic rules to be included in a Chapter 7.
- The taxes must be due for three years.
- The tax returns must be filed for two years.
- The tax assessment must be in place for at least 240 days.
- The taxes cannot be payroll taxes
If you have strong income or own enough assets to prevent you from qualifying for a Chapter 7 or if your taxes can't be included in a Chapter 7, your only bankruptcy option will be a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, you will have a repayment plan on your debts that is overseen by the court. You're likely to end up in a payment plan that lasts five years.
Without knowing more about your situation, such as your income for the past few years and what assets you own, I can't recommend bankruptcy as a solution.
Solution 2: Credit Card Debt Options
Outside of bankruptcy, there is no single solution that will work on both your credit card debt and your tax debt at the same time.
If your interest rates are your biggest problem in keeping up with your credit card debt, then a credit counseling program's Debt Management Plan (DMP) may be a good option. In the DMP, your interest rates could be reduced significantly, although your monthly program payment may not be much lower than your current monthly minimums. If you can reduce your interest rate, you will be able to pay off your debt faster, but you should expect the DMP to run about five years.
Debt settlement is a more aggressive approach than credit counseling, designed for people who either can't maintain their payments with their creditors or about to reach the point where making the payments as agreed is not possible.
A debt settlement firm negotiates settlements for you with your creditors. You can expect to pay back far less than what you currently owe, even when you factor in the fee that the settlement firm charges. A debt settlement program should have you out of credit card debt in two to four years, provided you can make the monthly program payments.
Debt Settlement's biggest negative is that it harms your credit rating. Your credit suffers because you choose to stop paying your creditors while saving up the money that will be used to pay the settlements that your debt negotiators reach for you. If getting out of debt is more important to you then your credit rating, then debt settlement is worth examining.
Make sure to choose a debt settlement firm that does not charge any up-front fees and is a member of The American Fair Credit Council.
Solution #3: Tax Debt Options
You need to resolve your tax problems directly with the tax authorities, whether the IRS or the state tax authorities. State tax debts need to be dealt with separately than IRS tax debts.
You can't include tax debt in either credit counseling or debt settlement programs. While there are various solutions for tax problems, they are limited.
Offer in Compromise
It is possible to settle IRS tax debt for less than you owe through the Offer in Compromise (OIC) program, but it is very hard to qualify for a successful OIC. In order for an OIC to succeed, you have to prove that you lack the ability to repay the tax debt, based on the IRS' examination of your income, assets, and living expenses.
OICs can be done by individuals, but OICs submitted by reputable professional tax relief firms have a far higher success rate than those individuals submit on their own.
Currently Not Collectible Status
If you don't qualify for an OIC due to the value of your assets, but can show the IRS that your basic living expenses (as the IRS defines them) are greater than your income, Currently Not Collectible (CNC) status can protect you from IRS collection efforts. CNC stops wage or bank levies, but does not make the tax debt go away.
If you don't qualify for either CNC or and OIC, it is likely that you will end up in a payment plan with the IRS. How much you will have to pay each month depends on how much you owe and what the IRS determines that you can afford pay them.
How your financial information is presented to the IRS makes a big difference in how they view your ability to pay. It can be very helpful to have an experienced tax professional represent you when negotiating a payment plan, especially if you owe more than $25,000.
I recommend that you look at each of the solutions I discussed. Speak with a bankruptcy attorney, to see if you qualify for Chapter 7 or whether Chapter 13 will deliver any relief.
Seek a consultation with both a credit counseling service and a debt settlement firm, and compare the pros and cons of each approach.
Speak with a tax relief firm, so you understand what tax solution you qualify for.
Whether or not you can wipe the slate clean easily, you need to work to find the best possible solution. Good luck!
I hope this information helps you Find. Learn & Save.