The Effect of Bankruptcy on Pending Offers in Compromise and Installment Agreements

Quick overview

Bankruptcy and IRS tax-resolution programs interact in specific, sometimes counterintuitive ways. Filing for bankruptcy triggers an automatic stay that pauses enforcement and collection actions, but it does not automatically make tax debt go away. Whether a pending Offer in Compromise (OIC) or an Installment Agreement (IA) survives, is altered, or is discharged depends on timing, the chapter filed (Chapter 7 vs Chapter 13), and whether the tax debt meets legal discharge rules under the Bankruptcy Code (11 U.S.C. §523). For IRS guidance on OIC and IAs, see the IRS pages on Offers in Compromise and Installment Agreements (irs.gov).

Key rules you need to know

• Automatic stay: The moment you file a bankruptcy petition, an automatic stay prevents most collection actions by the IRS while the case is pending (see U.S. Bankruptcy Code; IRS overview on bankruptcy). This includes levies, garnishments, and most collection communications.
• Whether tax debts are dischargeable depends on statutory timing rules. For many income tax liabilities to be dischargeable in Chapter 7, they generally must meet tests about the tax return due date, the date the return was filed, and when the tax was assessed. These rules are in 11 U.S.C. §523(a)(1) (see Cornell LII summary).
• Chapter choice matters: Chapter 7 can discharge qualifying old income taxes; Chapter 13 uses a repayment plan that can bundle priority and nonpriority taxes and may result in discharge after plan completion.

(Authoritative sources: IRS — Offer in Compromise (https://www.irs.gov/credit-pennant/offer-in-compromise); IRS — Installment Agreements (https://www.irs.gov/payments/installment-agreements); Cornell LII on 11 U.S.C. §523.)

What typically happens to a pending Offer in Compromise (OIC)

1. Immediate effect: filing bankruptcy usually halts active OIC negotiations because the automatic stay prevents collection and can change the taxpayer’s legal status. The IRS will not accept an OIC that conflicts with the bankruptcy estate’s administration without bankruptcy court approval.
2. Payments and fees: if you submitted an application fee and initial payments with your OIC (Form 656 or the streamlined equivalents), those funds may become property of the bankruptcy estate. In practice, the IRS may return payments or hold them pending court direction. Whether payments are returned is fact‑specific — discuss this with your bankruptcy attorney and tax professional.
3. Acceptance during bankruptcy: the IRS generally will not finalize an OIC while bankruptcy is pending unless the bankruptcy court authorizes it and any acceptance does not harm creditors. That makes acceptance uncommon during active bankruptcy proceedings.
4. After discharge or plan confirmation: once the bankruptcy case resolves (discharge in Chapter 7 or plan confirmation/completion in Chapter 13), you can usually reopen negotiations or apply for a new OIC based on your post‑bankruptcy financial picture. Your eligibility and reasonable collection potential (RCP) calculation will be based on the updated circumstances (see FinHelp’s guide on What Is an Offer in Compromise and How It Works).

Internal reference: For building an OIC financial package and understanding RCP, see “What Is an Offer in Compromise and How It Works” (https://finhelp.io/glossary/what-is-an-offer-in-compromise-and-how-it-works/).

What typically happens to an existing Installment Agreement (IA)

• Automatic pause: the automatic stay stops collection actions under an IA. The IRS must stop any levy or garnishment related to the tax while the bankruptcy case is active.
• Chapter 7: If eligible tax debts are discharged in Chapter 7, any ongoing IA that covered those discharged taxes will usually terminate because there is nothing left to collect. The IRS will update its records accordingly after the discharge is entered and processed.
• Chapter 13: IAs are often folded into the Chapter 13 plan. The bankruptcy trustee and court control payments; existing IAs may be suspended or modified so payments are made through the plan rather than directly to the IRS. At plan confirmation the tax debt treatment becomes part of the court‑approved repayment structure.

Internal reference: For types of installment agreements and how payments are calculated, see “Installment Agreements: Types, Costs, and How to Apply” (https://finhelp.io/glossary/installment-agreements-types-costs-and-how-to-apply/).

Practical timelines and actions (what to do if you have a pending OIC or IA and you plan to file bankruptcy)

1. Talk to both professionals — coordinate your bankruptcy attorney and your tax representative. Bankruptcy changes how the IRS and creditors are treated; a coordinated approach avoids surprises.
2. Notify the IRS and your assigned revenue officer or the IRS centralized OIC unit right after filing. Provide your bankruptcy case number, chapter, trustee name, and any local counsel details. Keep copies of all notices.
3. Ask your bankruptcy attorney whether OIC payments are property of the estate in your case and whether the trustee is likely to recommend returning funds or using them to pay creditors.
4. If you have an IA, confirm whether the trustee will include ongoing tax payments in the Chapter 13 plan or whether the IA will be suspended.
5. Prepare to re‑apply or renegotiate post‑bankruptcy. If taxes are not discharged, an updated OIC or IA may be necessary — but the IRS will recalculate your Reasonable Collection Potential using your new budget and asset picture.

Common situations and examples

• Example A — Pending OIC, file Chapter 7: Mary submitted an OIC with an initial payment. She later files Chapter 7. The bankruptcy automatic stay halts collections and the trustee may treat the OIC payment as estate property. Mary’s OIC negotiation is effectively paused; the IRS will usually not accept or finalize the OIC without court approval. After discharge, Mary can reapply; her eligibility will be evaluated using her post‑bankruptcy finances.
• Example B — Active IA, file Chapter 13: Joe had a long‑term partial payment IA. When he filed Chapter 13, the trustee proposed a plan that included past due taxes and current tax obligations. Joe’s IA payments were suspended and the bankruptcy plan controlled payment amounts until confirmation. On successful completion of the Chapter 13 plan, some tax debts not fully paid through the plan may be discharged or adjusted per the plan terms.

What taxes are usually dischargeable in bankruptcy?

Income taxes can be discharged if certain timing tests are met (generally: return due date at least three years before filing, return actually filed at least two years before filing, the tax was assessed at least 240 days before filing, and no fraud/intentional evasion). These rules are technical and fact‑sensitive — consult your attorney or see Cornell LII’s explanation of 11 U.S.C. §523(a)(1) and IRS guidance on bankruptcy and taxes.

(Authoritative citation: 11 U.S.C. §523(a)(1) summary via Cornell LII; IRS — Bankruptcy pages.)

Pitfalls and misconceptions

• Misconception: filing bankruptcy immediately makes all taxes vanish. Not true — many tax liabilities survive bankruptcy unless they meet specific criteria.
• Pitfall: stopping negotiations without counsel. Filing bankruptcy mid‑negotiation without advising your tax representative and counsel can lead to returned payments or lost bargaining position.
• Misconception: the IRS will always accept an OIC after bankruptcy. The IRS evaluates each case against its collection standards; discharge or a successful bankruptcy plan does not guarantee an OIC will be accepted.

Action checklist before filing bankruptcy (practical steps)

• Gather: copies of any OIC application (Form 656 or Form 656‑B), receipts of payments, IA agreement notices, and any IRS correspondence.
• Consult: talk to your bankruptcy attorney and an enrolled agent/CPA who handles tax resolutions.
• Disclose: provide full disclosure to the bankruptcy trustee about pending OICs and active IAs.
• Plan: discuss whether Chapter 7 or Chapter 13 better addresses your tax debts and long‑term goals.

When to consider reapplying or negotiating anew

After your bankruptcy case is closed and the trustee has reconciled estate assets, you may be eligible to apply for a fresh OIC or qualify for a new IA based on your rebuilt finances. In many cases a post‑bankruptcy OIC application benefits from simpler assets and lower income, but the IRS will require complete, accurate documentation.

Professional tips from practice

• Coordinate counsel: in my experience working with clients, cases where bankruptcy counsel and tax resolution specialists coordinated from the start resulted in fewer returned payments and clearer outcomes.
• Document everything: keep proof of mailing, trust accounting, and copies of IRS notices — these are critical if the trustee or IRS questions transactions.
• Be realistic: bankruptcy may offer immediate collection relief, but it is not a substitute for understanding whether taxes will remain after discharge.

Resources and further reading

• IRS — Offer in Compromise (https://www.irs.gov/credit-pennant/offer-in-compromise)
• IRS — Installment Agreements (https://www.irs.gov/payments/installment-agreements)
• Cornell Law School, Legal Information Institute — 11 U.S.C. §523 (discharge exceptions) (https://www.law.cornell.edu/uscode/text/11/523)
• FinHelp article: What Is an Offer in Compromise and How It Works (https://finhelp.io/glossary/what-is-an-offer-in-compromise-and-how-it-works/)
• FinHelp article: Installment Agreements: Types, Costs, and How to Apply (https://finhelp.io/glossary/installment-agreements-types-costs-and-how-to-apply/)

Professional disclaimer

This article is educational and reflects standard rules and commonly observed practices as of 2025. It is not legal or tax advice for your specific situation. Always consult a qualified bankruptcy attorney and a tax professional before filing bankruptcy or changing the status of an OIC or IA.