debt

Can bankruptcy boost your credit score?

Steve BucciDear Debt Adviser,
I don't think I will ever have a good credit score again. At one point, my score was 780. I was married and owned a house. Then my husband lost his job, became sick and eventually passed away. Needless to say, the house was foreclosed on, the car was repossessed, and I went into deep debt. I currently owe about $20,000 to the Internal Revenue Service. How do I dig myself out of this? Filing bankruptcy wouldn't be an option because it does not wipe out IRS debt.
-- MS

Dear MS,
I'm sorry to hear about the loss of your husband. For my readers with spouses, please use this as a reminder to purchase adequate life or disability insurance. It's a good idea to have enough insurance to cover outstanding debts (such as mortgage, car and credit card) for when a spouse gets injured or dies.

Your credit score is a reflection of your financial life, and yours has not been great lately. But once you get your financial life back on track, your credit score will follow. Let's explore some options to get you a winning score.

You didn't say if you're currently employed. But if you are, my guess is that the IRS will at some point attempt to garnish your wages. My recommendation is to head that off by contacting the IRS and requesting an installment agreement to pay your debt. Depending on your specific circumstances, the IRS may have a plan that would work for you. You can get information about installment agreements and payment plans at IRS.gov.

If you choose an IRS installment plan, you'd need to be able to pay off your $20,000 debt in five years or less. That would put your monthly payment at roughly $334. Keep in mind that as long as you owe taxes, all IRS income tax refunds will be applied to the balance until it is paid in full.

If you can't afford to pay the balance in five years or less, you may still qualify for a plan. But you'd need to submit a financial statement (Form 433-F), and the installment request must be reviewed by an IRS manager and approved. It would be best to use a tax professional to negotiate your installment plan request.

Also, don't discount a bankruptcy if you are deeply in debt to other creditors besides the IRS. I recommend that you meet with a bankruptcy attorney. Pick one who does a lot of bankruptcies rather than a general lawyer. It's important to do this right the first time. You may even be able to include the IRS debt in a Chapter 7 or Chapter 13 bankruptcy filing.

A bankruptcy will stay on your credit report for up to 10 years, and your credit score will not improve much as long as it's there. But if it can help you take care of the tax and any other debt, you will be well on your way to improving your credit.

Meanwhile, don't focus on your credit score. Focus on improving your financial life. As it improves, so will your score.

Good luck!

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