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Ask Dave

How Do I Deal With This Huge Debt?

Debbie owes big money to the IRS and is thinking about bankruptcy. She heard something about penalties that come with that, and needs Dave to tell her if it's true.

QUESTION: Debbie has an ongoing problem with the IRS. Since 1996, they have accumulated penalties and interest charges totaling over $500,000. They went to a bankruptcy attorney, who told them that the penalties would fall off if they declared. Is that true?

ANSWER: You need to have details in writing. Generally speaking, the IRS is not bankruptable. I’ve seen a lot of people use a Chapter 13 bankruptcy payment plan to control the IRS. The controlling wasn’t so much the fees as it was the cash flow.

Before I file bankruptcy, I’d hire a tax attorney to go over this whole thing. Get someone who knows where you can negotiate and where you can’t. Anytime you make a big decision, get someone who handles big bankruptcy matters and put in writing what the bankruptcy will do to the IRS. If they won’t do it, you don’t have the right person. If bankruptcy will reduce the debt to $200,000, then it’s something you consider. Then, if they go in and fight, ask if you can settle for $400,000.

At this stage of he game, taxes are forever. The other option is to sell your house, pay them and be free. Sit down and prayerfully decide which of those options to take.