Should I File Bankruptcy at the Risk of My Family?

“Dear Steve,

2005 I earned a few hundred thousand I could invest. Being young I took a risk, I provided a bridge loan of $135,000, Prepared by and attorney. In the same year I loaned the money the loan defaulted. So I wrote off the loan through the advise of an attorney and accountant. I was audited by the IRS which followed by the CA franchise tax board. IRS stated it was an investment and not eligible to be written off. We disagreed and scheduled a tax court date to dispute. My attorney went to arbitration and called me with two options. Agree to pay $65k or go to court and fight it. My attorney’s had a word of caution, the judge basically told him he did not want to see us in court. My attorney gave me the pros and cons of each decision and out of fear of loosing I took the reduced penalty. Since then through attorney costs, the loss of my business I started in I accumulated debt.

Here is the lay out of my situation:

DEBT
Owe Fed and State a combined total of $85k
-State on a 3 year payment plan
-Fed on a $250 mo plan (this will take over 2 decades to pay off)
Roughly $50k in Credit card debt
-Debt comprised of Attorney fees, property tax payments on my home and living expenses (Fuel, Groceries Utilities). If my credit card statements were audited since 2005 all charges were made out of living necessity.

Current Credit is great, I make all my payments on time.
I have a mortgage, interest only @ 3% maturing in Nov 2013 adjustment will be Libor + 2%
I make enough money to pay my minimums and exist.
I am in my 40s Married with kids
I do not have a college fund for the kids
I am unable to save anything for retirement
Occupation – I am an independent sales rep (1099)

My challenge
I have the ability to pay, but at the sacrifice of my family’s future
I feel very vulnerable about our financial future

Options:
The only way to get out of this debt especially the tax debt is bankruptcy
I paid $3,500 to file an offer and compromise but the IRS denied it because their calculations show I have the ability to pay
I visited a bankruptcy attorney and he says I pass the 4 tests to discharge the tax debt

Delemma
I left the bankruptcy attorney with an uneasy feeling. All my life I have always honored my commitments. Recently I spoke to a friend who I respect, just filed bankruptcy and got me thinking again. I am now once again leaning to bankruptcy. My debt or my family. My debt was a result of a bad business decision not irresponsible spending.

Should I file bankruptcy at the risk of my family?”

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The Answer

I recently wrote Do Not Avoid Bankruptcy which seems to apply in your case. From all accounts a bankruptcy would allow you to close the chapter on these past issues and move forward in a safer way.

It would have offered you a way to deal with the tax situation without paying for the worthless offer in compromise help. I’ve come to learn those are based on pure formula which you can actually gather for free on the IRS website.

If you were truly worried about strictly honoring your commitments then you never would have made the offer in compromise. I Actually suspect what is holding you up is simply bad assumptions and incorrect beliefs about what bankruptcy actually means.

I can’t see how filing bankruptcy creates any risk for your family. In fact it appears far riskier to not file bankruptcy which would then rob them of their financial future.

Please read through the articles and guides below to get back on track.

Bankruptcy Articles and Posts You Must Read

To get ready to read the information below with the right frame of mind, please first read How Do I Get Out of Debt Quickly? Change Your Mindset.

Bankruptcy Advice

Life After Bankruptcy

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

Should I File Bankruptcy at the Risk of My Family?
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  • blambro

    Thanks Steve,
    I appreciate the feed back. I am going to read up on the bankruptsy articles you shared

  • Norm

    What are the 4 tests to discharge tax debt?

    • blambro

      Just to clarify, I am not an accountant or an attorney. These are the qualifiers that are evaluated to consider if one is looking to discharge IRS tax liability. It doesn’t guarantee your tax debt will be discarged. If this is your delema, please consult a recomended bankruptsy attorney. Many bankruptsy attornies will provide a free inital consultation to help you get your arms around your specific situation.

      1. The three-year rule. The due date for filing the tax return (including extensions) must have been at least three years before the date the bankruptcy was filed.

      2. The two-year rule. The actual filing date of a late tax return must have been at least two years before the date the bankruptcy was filed.

      3. The 240 days rule. The tax must have been assessed at least 240 days before the bankruptcy was filed, exclusive of the time during which an offer in compromise with respect to that tax was pending plus 30 days, and exclusive of any time during which a stay of proceedings against collection was in effect because of a bankruptcy case plus 90 days.

      4. No fraud or tax evasion. The taxpayer may not have filed a fraudulent tax return or have committed tax evasion or willfully attempted to evade the tax.Just to clarify, I am not an accountant or an attorney. These are the qualifiers that are evaluated to consider one looking to discharge IRS tax liability.

      Hope this helps Norm.

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