November 23, 2017

Student Loan Workout Should Precede IRS Workout (Usually)

IRS monsterHow should you prioritize your payments when you have both tax debts and student loan debts? According to attorney Shawn Wright, a Pittsburgh, PA lawyer who represents clients in tax matters, student loan workouts and bankruptcy, you should apply for a student loan workout first, and thereafter apply for an offer-in-compromise or installment agreement with the IRS.

As Shawn notes, the IRS’ “Fresh Start Initiative allows taxpayers to include student loan payments as approved expenses in an IRS workout budget. This is a change from prior policy. In other words, when you apply for an IRS settlement, you have to submit a budget. The IRS will only acknowledge reasonable and necessary budget items – anything else will be considered disposable income that you can use to pay the IRS.

As of May 21, 2012, student loan expenses may be included in an IRS settlement budget. Other expenses, like credit card debts and personal loan repayments cannot be claimed at all on an IRS settlement budget. Further, the IRS limits what you can claim as “necessary” in categories such as housing, transportation and utilities.

If you claim a student loan payment on your IRS settlement budget you will need to show proof of payments. When you consolidate your existing loans into a new loan, or you rehabilitate your defaulted loan, you will need to show a payment history. This documentation can be submitted to the IRS.

Interestingly, the IRS website refers to “student loans guaranteed by the federal government.” It is silent as to private student loans. Private student loans, like federally issued or guaranteed student loans are not dischargeable in bankruptcy absent special circumstances, but unlike federal loans statutes of limitations do apply to private loans.

As a matter of practice, several IRS practitioners who I contacted about this issue say that they would include the private student loan expense in the tax compromise budget and then try to argue that this expense is reasonable and necessary.

So, it appears to me that private student loan debtors should not assume that their monthly loan payments will qualify as approved expenses when submitting an offer-in-compromise or installment agreement, although these expenses may be approved on a case by case basis.  No doubt this lack of certainty will produce a lot of stress – yet another reason to avoid private student loans.

Jonathan Ginsberg

Jonathan Ginsberg

Attorney at Law at Ginsberg Law Offices
Jonathan Ginsberg has served the Atlanta area community as a personal bankruptcy and student loan debt management lawyer for over 25 years. Contact Jonathan for straight answers to difficult debt problems.
Jonathan Ginsberg
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Jonathan Ginsberg

Jonathan Ginsberg has served the Atlanta area community as a personal bankruptcy and student loan debt management lawyer for over 25 years. Contact Jonathan for straight answers to difficult debt problems.

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