What about debts owed to the federal government?
Can a debt owed to the federal government be discharged?
Many debts owed to the federal government can be discharged in bankruptcy. If you owe money
because you received an overpayment by mistake, or if you did not pay back a loan other than a
student loan, the debt can be discharged. If the debt is the result of very bad conduct by the debtor,
such as fraud, theft, or embezzlement, that debt can be denied discharge. These reasons for denying
discharge of a particular debt apply to all debts, whether owed to a private company or to a
Can income taxes be discharged in bankruptcy?
Federal or state income taxes can be discharged only if certain special rules have been met. If you
want to discharge taxes in your bankruptcy, do not file bankruptcy until you have obtained legal
advice from an attorney who knows about both tax law and bankruptcy law. If you file a
bankruptcy too early, you may lose the ability to discharge a tax debt. If the IRS or the State of
Illinois has recorded a tax lien or issued a tax levy, the taxes are a secured debt, and the rules for
secured debts apply.
Can the government take my social security benefits to repay a debt?
If you owe money to the federal government, the government can take up to 15% of your Social
Security benefits to repay the debt. In addition, some debts initially owed to a state can be collected
by the federal government, if the federal government provided some of the funds. For example, if
you owed a welfare or food stamp overpayment to the State of Illinois, the federal government could
collect that debt from social security benefits because the federal government helps fund those
programs. Student loans in default that were made by or guaranteed by the federal government can
be collected from federal benefits.
What kind of federal payments can be taken to repay a debt?
Payments that you receive regardless of how much other income you have can be reduced to repay a
debt to the federal government. Social security, veterans compensation, part B black lung and
railroad retirement benefits, other than tier 2 payments, are examples of this type of benefits
Supplemental security income (SSI) and veterans pension benefits cannot be reduced to collect a
debt owed to a different agency because those benefits are “means tested” - they are only paid to
someone whose total income is below a certain level.
Why is it a bad idea to pay taxes by credit card?
If you pay taxes by credit card, you convert a debt that can eventually be discharged in bankruptcy
into a debt that survives a bankruptcy discharge. There is a better alternative if you owe taxes when
you file your tax return. You can ask for a repayment plan from the IRS. The IRS charges less
interest on repayment plans than the interest charged by most credit card companies.
What about student loans?
Student loans can only be discharged in bankruptcy if you prove that it would be an undue hardship
not to get a discharge of the student loan. This is an extremely hard standard to meet. If the loan is
federally guaranteed, almost all borrowers would get better results by using one of the programs for
defaulted student loans that are administered by the U.S. Department of Education.
How much can be taken from my social security or other benefits?
Your benefits can be reduced by 15% per month. For non-tax debts the first $750 per month of
benefits is exempt from reduction. The amount withheld each month is the lesser of: (1) the
amount owed; (2) 15% of the monthly benefit; (3) the amount by which the benefit payment exceeds
$750. For example, if the recipient receives a monthly benefit of $850, the amount deducted is the
lesser of $127.50 (15% of $850) or $100 ($850-750), or $100 a month. For tax debts, the reduction
is 15% of the monthly benefit, even if the benefit is under $750 per month.
What if my benefits are being reduced for another overpayment?
The monthly benefit amount is defined as the amount received after any deductions by the agency
paying the benefits to recover overpayments. This means that for some recipients the total amount
of their benefit reduction can be as much as 23.5%. For example, recipient is entitled to a social
security benefit of $1,000 per month. His benefits are being reduced by 10% for a prior social
security overpayment, so he has been receiving $900 a month. He has a food stamp overpayment
which has been referred by the U S Department of Agriculture to the Treasury. The 15% reduction
is applied to the $900 a month, resulting in an additional reduction of $135 per month, for a total of
$235 a month.
Do I get any advance notice that my benefits will be reduced?
For all debts other than taxes you should receive a notice from the Treasury Department informing
you of the amount owed, the agency that referred the debt to the Treasury, and a contact person at
that agency who can answer questions. You should receive notice of intent to offset 60 days before
the reduction goes into effect. During the 60 day period you can try to work out a repayment
agreement with the agency to whom the debt is owed, or explore other alternatives.
Additional information is available at the web site http://www.fms.treas.gov/debt/
If you owe federal taxes the IRS must give you 30 days advance notice. If during this time the
taxpayer and the IRS enter into a repayment agreement, the levy will not go into effect; if a
repayment agreement is reached later, the levy will be suspended. The taxpayer may make an
“offer in compromise”, which if accepted will result in forgiveness of the remaining tax debt after
completion of payments under the offer.
The taxpayer may also request relief based upon significant hardship. Requests for hardship
exemptions are reviewed by the IRS’ Taxpayer Advocate Service. The toll free number for that
office is 1-877-777-4778. Form 911, Application for Taxpayer Assistance Order, is available on
their web site, http://www.irs.gov/ind_info/advocate.html. The IRS will suspend the levy while a
request for hardship exemption is pending with the Taxpayer Advocate Service.