When a Partial-Payment Installment Agreement Is Better Than Bankruptcy

When a Partial-Payment Installment Agreement Can Be a Better Choice Than Bankruptcy

A partial-payment installment agreement (PPIA) is often overlooked when people face crushing debt, particularly tax debts. In my work advising clients for over 15 years, I’ve seen PPIAs stop wage garnishments, halt aggressive collection actions, and preserve homes and retirement accounts—without the legal costs, public records, and longer-term credit impact of bankruptcy. This article explains when a PPIA may be a superior option, how it works for tax debts, how it compares to bankruptcy, and practical steps to pursue one.

Why consider a PPIA instead of bankruptcy?

• Preserves assets. Bankruptcy (Chapter 7 or Chapter 13) can put property and future income under court supervision. A PPIA generally leaves your assets intact so long as they aren’t seized by ongoing levy actions that occurred before the agreement.
• Shorter process and lower cost. Negotiating a PPIA with the IRS or other creditors usually involves less legal expense and paperwork than filing for bankruptcy court protection.
• Credit outcomes can be less severe. Bankruptcy typically remains on a credit report for 7–10 years. A PPIA may be reported differently depending on the creditor and can be less damaging over time, especially if you keep the account current.
• Targeted relief. For tax liabilities specifically, a PPIA addresses the tax balance without forcing liquidation of nonexempt assets the way Chapter 7 might.

That said, a PPIA is not a cure-all. It’s most appropriate when creditors view partial repayment as more likely than no repayment, and when the taxpayer can prove that full payment is not reasonably collectible.

How a PPIA works for IRS tax debts (key mechanics)

• Financial review: The IRS evaluates your reasonable collection potential (RCP). That is an estimate of what can be collected from your future income and assets. If the RCP is less than the tax liability, the IRS may accept a PPIA.
• Temporary payments until CSED: A PPIA typically operates until the Collection Statute Expiration Date (CSED), after which the unpaid balance may no longer be collectible (usually 10 years from assessment, subject to extensions) — see IRS guidance on the CSED (IRS, Collection Statute Expiration Date: https://www.irs.gov/individuals/collection-statutory-expiration-date).
• Interest and penalties: Interest and penalties continue to accrue during a PPIA, so the unpaid balance generally grows until the underlying collection period ends (IRS, Installment Agreements: https://www.irs.gov/individuals/installment-agreements).
• Periodic reviews: The IRS may ask for updated financial information periodically (often every one to two years) to re-evaluate whether full collection has become possible.

Sources: IRS installment agreement guidance (IRS, 2025): https://www.irs.gov/individuals/installment-agreements and IRS collection rules: https://www.irs.gov/individuals/collection-statutory-expiration-date.

When a PPIA is clearly preferable to bankruptcy

1. Your goal is to keep assets that a bankruptcy trustee might liquidate (nonexempt property). If you can maintain modest monthly payments and the IRS accepts a PPIA, you avoid the risk of forced liquidation.
2. You have a stable but lower income and can make consistent modest payments. Bankruptcy could still be an option, but Chapter 13 can be more burdensome unless you need court protection for other creditors.
3. Your debts are primarily tax debts (IRS). The IRS has formal processes for PPIAs and is often willing to accept partial payments where an Offer in Compromise (OIC) is not available.
4. You want to avoid the stigma and credit report impact of bankruptcy. If a PPIA halts garnishments and protects wages, living expenses become manageable without a bankruptcy filing.

When bankruptcy may still be the right call

• If you have many secured debts and bankruptcy exemptions won’t protect your assets.
• If you owe large amounts on non-tax debt (credit cards, medical, student loans) where partial-payment negotiations are impractical and creditors won’t agree.
• If your income is so low that long-term partial payments won’t be sustainable and you need a fresh start now.

How to evaluate your eligibility and prepare a PPIA proposal

1. Gather financial documents: recent pay stubs, bank statements, a current budget, retirement account statements, and documentation of unavoidable monthly expenses.
2. Complete a Collection Information Statement: the IRS typically uses Form 433-F or similar financial forms to evaluate ability to pay. Be thorough and honest; underreporting income or assets can lead to revocation.
3. Calculate a realistic offer: base your monthly proposal on your net disposable income after essential expenses. Use our guide on calculating a realistic payment for an installment agreement for step-by-step help (FinHelp guide: How to Calculate a Realistic Monthly Payment for an Installment Agreement: https://finhelp.io/glossary/how-to-calculate-a-realistic-monthly-payment-for-an-installment-agreement/).
4. Consider professional help: a tax attorney or enrolled agent can package your documentation professionally and negotiate with the IRS collections officer.

Helpful internal guides: see our practical guide to negotiating an installment agreement (https://finhelp.io/glossary/practical-guide-to-negotiating-an-installment-agreement/) and instructions on requesting a PPIA (https://finhelp.io/glossary/how-to-request-a-partial-payment-installment-agreement-ppia/).

Negotiation tips and professional strategies

• Be proactive: reach out before levies or garnishments escalate—many clients get better terms if they approach the IRS early.
• Show verifiable hardship: documented medical bills, sudden job loss, or support obligations strengthen your case.
• Keep the offer sustainable: propose a payment you can meet; missed payments risk revocation and immediate collection action.
• Get agreements in writing: ensure the IRS or creditor provides written confirmation of any agreed terms, including review triggers and reporting impacts.

In my practice, clients who present organized, realistic budgets and consistent records get faster approvals and fewer surprises during periodic reviews.

Pros and cons — quick checklist

Pros:

• Avoid bankruptcy’s public filing and court costs
• Potentially keep homes, retirement, and other protected assets
• Shorter, lower-cost process if the creditor agrees

Cons:

• Interest and penalties continue to accrue
• Agreement may only last until the CSED, leaving a balance if collection continues
• Credit effects are reduced but not erased; some creditors report partial-payment status
• Periodic reviews can lead to revised payment demands

For a deeper dive on pros and cons specific to PPIAs, see our pros-and-cons article: https://finhelp.io/glossary/pros-and-cons-of-partial-payment-installment-agreements-2/.

What happens if you default on a PPIA?

Default may result in immediate collection actions such as levies or wage garnishments. The IRS may revoke the agreement and pursue the full balance. If your circumstances change, request a modification right away and keep documentation showing the event that caused the hardship.

For guidance on restarting or modifying agreements, see Modifying or Revoking an Existing IRS Installment Agreement (https://finhelp.io/glossary/modifying-or-revoking-an-existing-irs-installment-agreement/).

Quick decision checklist

• Are most of your debts tax-related? If yes, PPIA is a strong option.
• Can you make a modest, reliable monthly payment? If yes, a PPIA may work and avoid bankruptcy.
• Do you have nonexempt assets you want to protect? PPIA may preserve them.
• Do you need a legal discharge of certain debts now (e.g., unsecured credit cards)? Bankruptcy might be preferable.

Final thoughts and next steps

A PPIA is a practical, frequently underused alternative to bankruptcy—especially for tax debts—when you can demonstrate limited ability to pay but can make consistent, reduced payments. It avoids many of the immediate and long-term costs of bankruptcy and can be the right move for people who want to retain assets and avoid court. However, PPIAs are not automatic; they require truthful financial disclosures and ongoing compliance.

If you’re weighing options, first gather your financial records, estimate a realistic monthly payment, and consult a tax professional or an enrolled agent to assess whether a PPIA or bankruptcy better meets your goals.

Professional disclaimer: This article is educational and does not constitute individualized legal or tax advice. For personal recommendations, consult a qualified tax attorney, enrolled agent, or bankruptcy attorney.

Authoritative sources

• IRS — Installment Agreements: https://www.irs.gov/individuals/installment-agreements
• IRS — Collection Statute Expiration Date: https://www.irs.gov/individuals/collection-statutory-expiration-date

Interlinks (FinHelp resources)

• IRS Installment Agreements: Types, Costs, and Application Tips — https://finhelp.io/glossary/irs-installment-agreements-types-costs-and-application-tips/
• How to Request a Partial Payment Installment Agreement (PPIA) — https://finhelp.io/glossary/how-to-request-a-partial-payment-installment-agreement-ppia/
• Choosing Between an Installment Agreement and an Offer in Compromise — https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-an-offer-in-compromise/