What Could Happen If You Don’t Pay on Time in a Payment Plan?

A payment plan offers a structured way to settle outstanding debts by breaking down a large sum into manageable, periodic installments. This arrangement, common with entities like the IRS or other creditors, helps individuals fulfill financial obligations when immediate lump-sum payment is not feasible. Adherence to the agreed-upon payment schedule is paramount, as the plan is designed to help avoid more severe collection actions.

Consequences of Missed Payments

Failing to make a payment on time within an established payment plan can trigger immediate repercussions. For instance, if a payment is missed on an IRS installment agreement, the agency typically sends a Notice CP523, indicating a default and potential termination. Interest continues to accrue on the outstanding balance from the original due date, and penalties for late payment are also imposed. For federal tax debts, the failure-to-pay penalty is generally 0.5% of the unpaid tax for each month or part of a month the tax remains unpaid, capped at 25%. If an approved payment plan is in place, this penalty can be reduced to 0.25% per month.

The IRS also charges interest on underpayments, which is the federal short-term rate plus three percentage points, compounded daily. For the first half of 2025, this interest rate for individuals is 7%. Other creditors may impose their own late fees or increase interest rates as outlined in the payment plan agreement. A missed payment signals that the agreement’s terms have been violated, setting the stage for further collection efforts if not addressed promptly.

Restoring Your Payment Plan

After missing a payment, it is often possible to reinstate a payment plan by taking prompt action. The first step involves contacting the relevant agency or creditor as soon as possible to discuss the missed payment. For IRS installment agreements, taxpayers typically receive a Notice CP523, which provides a window, often around 30 days, to pay the missed amount and any associated penalties and interest to prevent termination. Reinstating an IRS payment plan online generally incurs a $10 fee, while doing so over the phone or in person may involve a higher fee.

If the missed payment is due to insufficient funds or incorrect banking details for direct debit, manually making the payment and contacting the agency to correct the issue is advised. Proactive communication and payment of the overdue amount are crucial to getting back on track and avoiding more severe consequences.

Impact of Payment Plan Termination

If a payment plan is officially terminated due to continued non-payment or failure to resolve a default, the consequences become significantly more severe. The entire outstanding balance typically becomes immediately due, eliminating the structured payment arrangement. For tax debts, the IRS can then pursue aggressive collection actions that were previously held at bay by the payment plan. These actions can include wage garnishments, where a portion of your paycheck is seized directly by the IRS from your employer.

The IRS can also implement bank levies, freezing and seizing funds directly from your checking or savings accounts to satisfy the debt. Additionally, a federal tax lien may be filed against your property, which is a legal claim to secure the government’s interest in your assets and can negatively impact your credit score and ability to sell or refinance property. Terminating a payment plan can also jeopardize future eligibility for similar financial relief options, making it more challenging to negotiate favorable terms for debt resolution in the future.

Adjusting Your Payment Plan

If financial circumstances change, making it difficult to adhere to the current payment plan, proactively seeking an adjustment can prevent default. Contacting the agency or creditor before missing payments is often beneficial to explore modification options. For IRS payment plans, individuals can request changes such as lowering monthly payments, extending the repayment period, or even adding new tax debt to an existing plan. The IRS Online Payment Agreement tool can be used for some modifications, or individuals can contact the IRS by phone.

The IRS may require financial documentation to support a modification request, especially if seeking a significant reduction in payments or owing a larger amount. While some modifications might incur a restructuring or reinstatement fee, it is generally a more favorable outcome than defaulting. Communicating openly about financial hardship can lead to options like a temporary suspension of payments or a revised payment schedule, helping to maintain the agreement and avoid escalated collection measures.