How Bankruptcy Interacts with IRS Installment Agreements

Author credentials

As a CPA and CFP® with over 15 years helping clients resolve tax and debt problems, I’ve seen how small mistakes—like failing to disclose an IRS installment agreement—can leave people paying longer or facing additional penalties. This article explains the practical rules, key tests for dischargeability, common pitfalls, and the exact actions you should take when bankruptcy and an IRS installment agreement collide.

How bankruptcy and an IRS installment agreement interact

When you file bankruptcy, an automatic stay usually halts most collection actions by creditors, including many IRS collection steps. But the stay and the bankruptcy’s outcome don’t automatically erase IRS obligations. Whether your installment agreement continues, is superseded, or becomes obsolete depends on two things:

• Which bankruptcy chapter you file (most individuals file Chapter 7 or Chapter 13).
• Whether the tax debt is dischargeable under the Bankruptcy Code.

Key takeaways up front

• Chapter 7: If the IRS tax debt qualifies as dischargeable, the bankruptcy discharge eliminates the tax liability and the installment agreement becomes moot. If the tax is non‑dischargeable, the agreement typically ends and you must negotiate new terms or repay the debt after bankruptcy.
• Chapter 13: The Chapter 13 repayment plan usually supersedes any prior IRS installment agreement—tax debts are paid through the court‑approved plan. Priority (non‑dischargeable) taxes usually must be paid in full during the plan.
• Always disclose IRS debts to your bankruptcy attorney. Failure to disclose can lead to case dismissal or denial of discharge.

What makes a tax debt dischargeable?

There are strict legal tests for discharging income tax in bankruptcy. Generally, for an income tax to be dischargeable in Chapter 7 or Chapter 13 it must meet all of the following (commonly framed as the “3‑2‑240” rule):

1. The tax return was due at least three years before the bankruptcy filing (including extensions).
2. The tax was assessed by the IRS more than 240 days before the bankruptcy filing.
3. The tax return was filed at least two years before the bankruptcy filing.

Additional bars to discharge include:

• Fraud or willful evasion: Taxes assessed as a result of fraud, fraudulent returns, or criminal conduct are generally non‑dischargeable.
• Trust fund taxes and certain payroll withholding liabilities (e.g., Trust Fund Recovery Penalty) are typically not dischargeable.
• Unfiled returns: If you never filed a return for the year in question and the IRS assessed tax or filed a substitute return, that tax usually cannot be discharged.

(Author note: These tests are rooted in bankruptcy law and IRS practice. For official guidance on installment agreements and IRS procedures, see the IRS Installment Options page.)

Chapter 7: what happens to your installment agreement?

Chapter 7 is a liquidation chapter. If you qualify and the trustee finds no non‑exempt assets to sell, your case may result in a discharge of certain debts. For IRS installment agreements:

• If the tax is dischargeable, the bankruptcy discharge eliminates the tax liability. Once discharged, the installment agreement for that debt has no legal effect—the IRS cannot continue collecting on a discharged liability. You should receive a discharge order from the bankruptcy court that documents which debts were discharged.
• If the tax is non‑dischargeable, you remain liable for it after the bankruptcy. Practically, many people stop making installment payments once they file; but stopping without counsel is risky. The IRS may terminate the pre‑bankruptcy installment agreement when they learn of the bankruptcy filing. After discharge, you will likely need to set up a new agreement or pursue other resolution options (for example, an Offer in Compromise if eligible).

Chapter 13: how the repayment plan changes payments

Chapter 13 is a reorganization for individuals with regular income and allows you to propose a 3–5 year repayment plan. For IRS installment agreements:

• The Chapter 13 plan typically supersedes any prior installment agreement for debts included in the bankruptcy plan. Instead of paying the IRS directly under the old plan, the plan trustee collects payments and distributes funds according to the plan’s priorities.
• Priority taxes—often non‑dischargeable unless specific conditions are met—are generally paid in full through the Chapter 13 plan.
• If a tax is dischargeable under the tests above but included in the Chapter 13 plan and you complete the plan, remaining eligible unpaid balances may be discharged at the end of the plan term.

Practical example from practice: A client entered Chapter 13 with a pre‑existing IRS installment agreement. The plan paid the priority taxes through the trustee and the old installment agreement was effectively ended. Communication between the bankruptcy lawyer and the IRS reduced duplicate payments and halted interest accumulation that would have otherwise continued under the old plan.

Does filing bankruptcy stop IRS collection actions?

Filing a bankruptcy petition generally triggers an automatic stay that halts many collection actions, including levy and garnishment. However:

• The IRS can ask the bankruptcy court to lift the stay for certain tax enforcement actions (for example, to continue an ongoing audit or to secure a tax lien enforcement).
• The automatic stay does not change whether a tax is dischargeable. Non‑dischargeable taxes may be paused temporarily but remain payable.

What to do if you have an active installment agreement and are considering bankruptcy

1. Don’t stop payments without advice. In some cases continuing payments preserves rights or prevents accumulation of penalties while your attorney evaluates options.
2. Tell your bankruptcy attorney about every IRS agreement, lien, and notice—full disclosure is mandatory in bankruptcy schedules.
3. Ask your attorney and tax advisor to determine dischargeability. That analysis will guide whether bankruptcy is likely to eliminate the tax debt or simply delay collection.
4. If you file Chapter 7 and taxes aren’t dischargeable, be prepared to negotiate a new installment agreement after discharge. If you file Chapter 13, your attorney must include the tax priority claims in the chapter plan.
5. Keep records. Save the installment agreement, payment history, liens, notices, and any correspondence with the IRS.

Setting up a new installment agreement after bankruptcy

If taxes survive the bankruptcy (are non‑dischargeable), you’ll usually need to re‑establish a payment approach with the IRS. After a Chapter 7 discharge you can contact the IRS to request a new installment agreement based on your post‑bankruptcy finances; the IRS will evaluate ability to pay and may require financial statements. After Chapter 13, tax liabilities are often already handled within the plan. For current IRS options and requirements, review the IRS guide to installment options.

When to consider alternatives to an installment agreement

• Offer in Compromise (OIC): If you can’t reasonably pay the tax in full and meet strict eligibility, an OIC may settle the tax for less than the full balance. OIC rules are restrictive—talk with a tax professional before applying.
• Currently Not Collectible (CNC): If your income is too low to support payments, CNC status pauses collection though interest and penalties usually continue to accrue.

Common mistakes and how to avoid them

• Mistake: Not disclosing IRS debts on bankruptcy schedules. Consequence: Denial of discharge or case dismissal.
• Mistake: Assuming all tax debt is dischargeable. Consequence: Continued collection actions after bankruptcy.
• Mistake: Entering a new IRS installment agreement while a bankruptcy petition is pending without counsel. Consequence: Confusion, duplicate payment obligations, and potential court issues.

Related resources on FinHelp

• For details about paying taxes and how bankruptcy affects tax liens, see How Bankruptcy Affects Federal Tax Debt and Liens: https://finhelp.io/glossary/how-bankruptcy-affects-federal-tax-debt-and-liens/
• For the rules that determine discharge of income taxes, see Discharge of Tax Debt in Bankruptcy: https://finhelp.io/glossary/discharge-of-tax-debt-in-bankruptcy/
• If you’re leaning toward Chapter 13, read Chapter 13 Bankruptcy Explained for plan mechanics and timelines: https://finhelp.io/glossary/chapter-13-bankruptcy-explained/

Authoritative external source

• IRS — Installment Options: https://www.irs.gov/payments/installment-options (consult this page for IRS procedural details and current application processes).

Frequently asked questions

Q: Can I set up a new IRS installment agreement while a bankruptcy case is pending?
A: Generally no—if the tax liability is part of the bankruptcy estate, the bankruptcy process and court‑approved plan govern payments. Always coordinate with your attorney before contacting the IRS mid‑case.

Q: Will interest and penalties stop during bankruptcy?
A: Interest and penalties may be paused during the automatic stay, but unless the tax is discharged they generally continue to accrue and will be considered in any repayment plan or post‑bankruptcy agreement.

Q: What documents will the IRS and trustee want to see?
A: Recent tax returns, notices of assessment, the original installment agreement, pay stubs, bank statements, and a bankruptcy schedule listing debts.

Final practical checklist

• Confirm which taxes are included in the bankruptcy petition and whether they meet the 3‑2‑240 tests for dischargeability.
• Work with both your bankruptcy attorney and a tax professional to coordinate the trustee, the IRS, and any installment agreements.
• Don’t assume a pre‑bankruptcy IRS installment agreement will survive the case—plan for negotiation or re‑establishment after discharge.

Professional disclaimer

This article is educational and does not replace legal or tax advice. Bankruptcy and tax law are fact‑specific and regularly updated. Consult a qualified bankruptcy attorney and a tax professional (CPA or Enrolled Agent) for guidance tailored to your situation.