Prof. Hernandez: Using Tax Installment Agreements to Qualify for Chapter 7

In the world of consumer bankruptcy law, the “Means Test” often feels like a wall too high to climb over. If your six-month average income is just a few dollars over the median, many bankruptcy attorneys will tell you that a Chapter 13 repayment plan is your only option.

However, one effective tactic I’ve used to help my clients qualify for a Chapter 7 bankruptcy involves a simple approach to tax debt.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways: Using Tax Payments to Qualify for Chapter 7 Bankruptcy

• Schedule J Expenses: Passing the Means Test is only one part of qualifying for Chapter 7 bankruptcy. Your monthly expenses on Schedule J, when compared to your income (Schedule I), must be minimal.
• The IRS Installment Agreement: By continuing your tax payments to the IRS or entering into an agreement, you could reduce your disposable income, helping you qualify for Chapter 7 bankruptcy.
• Mandatory vs. Discretionary Expenses: Unlike certain expenses, which can be argued as discretionary, payments toward non-dischargeable tax debt are viewed as mandatory. This makes them a superior tool for shielding income from other creditors.
• Proof of Payment is Critical: To use this tactic, you must actually be in a “performance” phase. The Bankruptcy Trustee will look for proof of these IRS payments on your bank statements. You cannot simply “intend” to pay; the expense must be active at the time of filing.

Schedule I & J of the Bankruptcy Petition

While the Means Test (Form 122A) looks at your historical income (last six months), Schedules I and J look at your current reality. Even if you “pass” the Means Test, your actual monthly net income is also critical.

For example, if you have $500 left over at the end of the month, regardless of qualifying income under the Means Test, the bankruptcy trustee will object to your Chapter 7 filing since you have the “ability to pay” creditors and push you into a 5-year Chapter 13 plan.

Professor’s Note: Before making any financial moves, consult your bankruptcy attorney. I have seen clients make ‘smart’ choices, such as surrendering an upside-down vehicle that backfired legally.

By eliminating that monthly payment, they inadvertently reduced their expenses to the point where they no longer qualified for Chapter 7 bankruptcy. A move intended to save money ended up forcing them into a five-year Chapter 13 repayment plan.

Turning “Disposable Income” into a “Mandatory Expense”

When you owe the IRS, that debt is generally non-dischargeable unless it meets very specific age requirements. Besides the Means Test, the bankruptcy trustee compares Schedule I (Income) to Schedule J (Expenses).

Since IRS debt must be paid, a formal installment agreement transforms that “extra” cash in your budget into a mandatory expense on Schedule J.

The Legal Strategy to Reduce Disposable Income

The IRS Installment Agreement: If you had an installment agreement with the IRS that has been paused, start up the payments again. If you have a pending tax liability, but have not reached an agreement with the Internal Revenue Service (IRS), contact the IRS and schedule a payment plan.

Professor’s Tip: Not all IRS agents are the same. While my experience has been that the IRS is generally flexible with installment agreements, you may encounter an agent demanding a monthly amount that is financially impossible.

In these cases, be transparent: inform them that you are preparing to file for bankruptcy. Once the bankruptcy is approved and you receive your Order of Discharge, you can revisit the payment amount. Make sure the amount you agree to is close to the amount of disposable income.

Document the Expense: On Schedule J (Line 16 or 17), list the monthly installment as a necessary expense.

The Result: By committing those disposable funds to the IRS, your net monthly income on Schedule J drops, effectively shielding that money from being “available” to fund a Chapter 13 bankruptcy.

Why This Works in 2026

In the current 2026 economic climate, many families are “on the bubble.” They make “too much” for a Chapter 7 but not enough to actually survive a 60-month Chapter 13 plan. However, by prioritizing the IRS, a creditor that has far more power than a standard collection agency, you can save yourself from the complications of a lengthy Chapter 13 bankruptcy and wipe out your unsecured debt between three and six months.

The Professor’s Conclusion

Consistency is key. The Trustee will look at your bank statements during the 341 Meeting to see if you have actually started making these payments. You cannot simply “reserve” the money; you must be in active repayment. It’s best to start the payments way in advance of filing.

Filing bankruptcy is a chess match, not a race. Sometimes, taking a few months to set up the right tax payment structure is the difference between five years of court-ordered payments and a total discharge of your debt within months.

As we move deeper into the 2026 tax season, it is vital to understand that your tax return is more than just a refund. It is a strategic asset in your bankruptcy filing. Whether you are seeking a straight discharge or a structured repayment plan, how you handle these funds can determine the success of your case.

To ensure you are maximizing your “Fresh Start,” I invite you to explore my full series on the intersection of tax law and consumer bankruptcy:

• Saving Your Refund in Chapter 7: Learn how to use the 2026 “Wildcard Exemption” to protect your tax refund from the Bankruptcy Trustee and keep that cash in your pocket.
• Funding Your Chapter 13 Plan: Discover how a seasonal tax refund can be used to catch up on mortgage arrears or lower your monthly plan payments.
• Investing in Your Future: Why using your tax refund to pay your bankruptcy attorney is often the smartest financial move you can make to secure a debt-free future.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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