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Bankruptcy Can Remove a Judgment Lien

Posted by Kevin on August 19, 2019 under Bankruptcy Blog | Comments are off for this article

Do you have a judgment lien on your home? If so, the debt on that judgment is secured by whatever equity you have in your home.

A judgment lien on your home gives the creditor holding the judgment lien legal rights against your home.  A judgment lien holder on your home can, under some circumstances, foreclose on your home. At the least, it can force you to pay the debt when you sell or refinance your home.

Bankruptcy can help. Filing bankruptcy usually results in the legal write-off (the “discharge”) of the debt.  The problem is that in many situations bankruptcy does not curtail creditors’ lien rights which pass through the bankruptcy.  Even though you discharge that debt, the lien still survives. It can and does come back to haunt you even after a successful bankruptcy.

However, with a judgment lien on your home, bankruptcy often CAN get rid of the judgment lien.  This is a potentially huge benefit of filing bankruptcy. The process of getting rid of a judgment lien within bankruptcy is called “judgment lien avoidance.” 

The Conditions for Judgment Lien Avoidance

Here’s how the process works.

When you file bankruptcy, to “avoid” a judgment lien you must file what is called a motion with the Court and meet certain conditions:

  • The lien you’re getting rid of must be a “judicial lien.” That’s legally defined as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”  Mostly, this refers to judgment liens.
  • The judgment lien can attach to “real property or personal property that the debtor or a dependent of the debtor uses as a residence.”
  • The judgment lien can’t be for child or spousal support or for a mortgage.
  • The judgment lien “impairs” the homestead exemption.  In earlier versions of the Bankruptcy Code, the concept of impairment was, at times, confusing.  However, under the current Code, it is pretty much a straightforward analysis.

Essentially, you’re entitled to protect the equity in your home provided by the homestead exemption. To the extent a judgment lien eats into that homestead exemption-protected equity, that portion of the lien is avoided, or negated.

For Example

Assume you had $20,000 of equity in your home beyond your first mortgage. Assume also that your designated homestead exemption amount is $25,000. (This varies by state.) This would mean that all of that $20,000 in equity would be protected by the homestead exemption. Then add that a hospital got a judgment against you of $15,000 which became a judgment lien recorded against your home. If you filed a bankruptcy case and moved to avoid that judgment lien, it would be completely avoided because:

  • It’s a judicial lien—one “obtained by judgment.”
  • The lien attaches to your homestead—the place you “use as a residence.”
  • The lien was not for child or spousal support or related to a mortgage.
  • All of this $15,000 judgment lien impairs your homestead exemption—eats into the home equity, all of which is protected by the exemption.

In this example, bankruptcy would very likely discharge the $15,000 hospital debt itself. And the motion to avoid the judgment lien would very likely be successful. You would no longer owe the debt. And your home would no longer be encumbered by the judgment lien.

Business Litigation that Continues After You File Bankruptcy

Posted by Kevin on August 6, 2019 under Bankruptcy Blog | Comments are off for this article

Lawsuits against You that Bankruptcy Ends

Many legal claims against you or your closed or closing business are resolved by the filing of your bankruptcy case. They are resolved either legally or practically, or both.

Claims that are legally resolved by your filing of bankruptcy are those intended to make you pay money.  The discharge (the legal write-off) in bankruptcy of whatever debt you owe will usually result in you not needing to pay anything on the claim under Chapter 7 “straight bankruptcy.” There’s not much point to a lawsuit to determine whether you owe money or about how much you owe if any such debt will just get discharged in bankruptcy.

Lawsuits that Bankruptcy Does NOT End

However, there are certain types of debts that would still need to be resolved by a court. In these situations the creditor would likely get permission from the bankruptcy judge to start a lawsuit or to continue one already started. Here are three types that need court resolution.

1) Determining the Amount of a Debt

If a debt is being discharged in a no-asset Chapter 7 case—one in which all assets of the debtor are “exempt” and protected—then, as indicated above, the amount of that debt makes no practical difference. Whatever the amount of the debt, it is getting discharged without payment of anything towards that debt.

But in an asset Chapter 7 case, in which the bankruptcy trustee is anticipating a pro rata distribution of the proceeds of the sale of assets, the amounts legally owed on all the debts need to be known for that distribution to be fair to all the creditors.  That’s because the established amount of any single debt affects the amounts received by all the creditors. So litigation to determine the validity or amount of a debt needs to be completed, even if by a relatively quick settlement.

2) Possible Insurance Coverage of the Debt

If a claim against a debtor may be covered by insurance, then the affected parties likely want the dispute to be resolved legally.

That’s because a court needs to determine 1) whether the debtor is liable for damages, 2) whether those damages are covered by the insurance, and 3) whether the policy dollar limits are enough to cover all the damages or instead leave the debtor personally liable for a portion. The following types of business litigation tend to involve insurance coverage issues:

  • vehicle accidents involving the business’ employees or owners, especially those with the complication of multiple drivers (and thus, multiple possible insurance coverages)
  • claims on business equipment damaged by fire or flood, or stolen

In these situations the bankruptcy court will likely give permission for the litigation to continue outside of bankruptcy court, while not allowing the creditor to pursue the debtor as to any amount not covered by the insurance policy limits.

3) Nondischargeable Debts

Some of the biggest fights about business-related debts occur when a creditor argues that its debt should not be discharged in the bankruptcy case.  The grounds for objecting to discharge are quite narrow—in general the debtor must have defrauded the creditor, embezzled or stolen from the creditor, or intentionally and maliciously hurt the creditor or its property.

Also, and much more prevalent in the last few years, are student loan debts.  Since the average student loan debt for an undergraduate is zeroing in on $40,000, litigation over whether the student loan debt is dischargeable, is become much more commonplace.

The Truly Amazing History of Bankruptcy Law

Posted by Kevin on August 4, 2019 under Bankruptcy Blog | Be the First to Comment

Debtors’ prisons? There’s that and a lot more to the very colorful history of bankruptcy law.

 

American bankruptcy law naturally grew out of the law of England during our colonial history. Pre-Revolutionary War bankruptcy laws were extremely different from current law.

  • The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry VIII. Debtors were called “offenders” under this first law, in effect seen as perpetrators of a property crime against their creditors. The purpose of this law, and as expanded during the following hundred and fifty years, was not to give relief to debtors. Rather it was to provide to creditors a more effective way to collect against their debtors.
  • Given this purpose, it is not surprising that this first law did not give debtors a discharge—a legal write-off—of their debts. In a bankruptcy the assets of the “offender” were seized, sold, and the proceeds distributed to creditors. And then the creditors could still continue pursuing the “offender” for any remaining balance owed.
  • A bankruptcy proceeding could only be started by creditors, not by debtors.  Creditors accused a debtor of an “act of bankruptcy,” such as physically hiding from creditors, or hiding assets by transferring them to someone else.  The current extremely seldom used “involuntary bankruptcy” is a remnant of this.
  • Strangely, only merchants could file bankruptcy. Why? Credit was seen as immoral, with only merchants being allowed to use credit, for whom it was seen as a necessary evil. As the only ones who had access to credit, only merchants had the capacity to become bankrupt.
  • For the following century and a half through the late 1600s, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” to seize their assets, put them into pillories (structures with holes for head and hands used for public shaming), and even cut off their ears.
  • Finally in the early 1700s the discharge of debts was permitted for cooperative debtors, but only if the creditors consented!
  • Yet the law still provided for the death penalty for fraudulent debtors (although it was very seldom used).
  • Cooperative debtors received an allowance from their own assets, the very early beginnings of the current Chapter 13 “adjustment of debts.”

So this was the English bankruptcy law that was largely in effect at the time that the U.S. Constitution was adopted. That gives some perspective on what the framers may have had in mind with the Bankruptcy Clause of the U. S. Constitution. That Clause gave Congress power to “pass uniform laws on the subject of bankruptcies.” Fortunately the language is so open-ended that it gave bankruptcy laws the opportunity to evolve during the last two hundred fifty years into one infinitely both more compassionate and beneficial for the economy.

But this evolution during our national history was extremely rocky, until surprisingly recently. That is the topic of the next blog. 

 

The Benefits of Both “Asset” and “No Asset” Chapter 7 After Closing Down a Business

Posted by on July 14, 2019 under Bankruptcy Blog | Comments are off for this article

Besides wiping out (“discharge” is the legal term) your personal debts like credit cards and medical expenses, a Chapter 7 case can discharge all or most of your personal liability from a closed sole proprietorship, corporation, LLC, or partnership.  You are liable for the debts of a sole proprietorship and a partnership.  You can be liable for LLC or corporate debt to the extent that you signed a guarantee or in other circumstances.

 “Asset” and “No Asset” Chapter 7

Chapter 7 is sometimes called the liquidation form of bankruptcy.  That usually does NOT mean that if you file a Chapter 7 case,  all of your assets will be liquidated or sold.   One of the main purposes of the Bankruptcy Code is to give an honest debt a fresh start.  You get a fresh start by the discharge of most of your debts and keeping property that is exempt.

As a debtor in New Jersey, you can choose the exemptions listed in the Bankruptcy Code (called the federal exemptions) or you can use the exemptions provided under New Jersey statutes.  Since the federal exemptions are much more favorable to the debtor than the New Jersey exemptions, almost all NJ debtors utilize the federal exemptions.  If everything you own is exempt, you would have a “no asset” case, so-called because the Chapter 7 trustee has no assets to collect or distribute to your creditors .

In contrast, if you own something that is not exempt, and the trustee decides that it is worth liquidating and using the proceeds to pay a portion of your debts, then your case is an “asset case.”

The Quick “No Asset” and the Drawn Out “Asset” Case

Generally, a “no asset case” is simpler and quicker than an “asset case” because it avoids the asset liquidation and distribution to creditors process.

A simple “no asset” case can be completed in about three to four months after it is filed (assuming no other complications arise).  An asset case can take a year or more.

The Potential Benefits of an “Asset” Case

If you have an asset case, that can be turned to your advantages.  Two situations come to mind.

First, you may decide to close down your business and file a bankruptcy immediately in order to hand over to the trustee the headaches of collecting and liquidating the assets and paying your business creditors .  If you’ve been fighting for a long time to try to save your business, you avoid the added headache and expense of negotiating work-out terms with all the creditors.

Second, in the Chapter 7 process, certain debts, called priority debts, are paid first.  General debts get paid afterwards to the extent there are available funds.  More importantly, certain priority debts are not discharged by the bankruptcy.  That means you still owe them after the bankruptcy is completed.  Examples of priority debts that are not dischargeable include child and spousal support arrearages, and certain tax claims.

So, as a debtor, you want to pay off as much non-dischargeable debts as you can.  To the extent you have non-exempt assets, the Trustee can use the proceeds of the sale of those assets to pay off some or all of your priority, non-dischargeable debts. Non priority debts (except for most student loans) are discharged regardless of whether they receive payment in the Chapter 7.

Consumer Bankruptcy Series Episode One – Introduction

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Consumer Bankruptcy Series Episode Two – General Overview

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Consumer Bankruptcy Series Episode Three – Starting the Bankruptcy Process

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Consumer Bankruptcy Series Episode Four – The Means Test

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Consumer Bankruptcy Series Episode Five – Chapter 7 Bankruptcy Basics

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Consumer Bankruptcy Series Episode Six – Chapter 13 Bankruptcy Basics

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Consumer Bankruptcy Series Episode Seven: Chapter 13 Payments

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Consumer Bankruptcy Series Episode Eight – Monthly Disposable Income

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Consumer Bankruptcy Series Episode Nine – Chapter 13 Bankruptcy: Mortgages

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Consumer Bankruptcy Series Episode Ten – Chapter 13 Bankruptcy: Motor Vehicles

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If You Owe Both 2018 AND Earlier Income Taxes

Posted by Kevin on June 3, 2019 under Bankruptcy Blog | Comments are off for this article

Chapter 13 “adjustment of debts” case enables you to include 2018 income taxes into your Chapter 13 payment plan. That would:

    1. Save you money on payment of your 2018 tax;
    2. Give you financial flexibility;
    3. Stop any present and future tax collections and the recording and enforcement of a tax lien on the 2018 tax.

So Chapter 13 is a helpful tool for dealing with taxes you owe for the 2018 tax year. Sometimes it’s even absolutely indispensable—it solves a debt dilemma that appeared otherwise insolvable.

When You Also Owe Income Taxes for Earlier Years

However, Chapter 13 is a particularly powerful tool if you owe not just for 2018 but for other tax years (or year) as well. This is true wherever you stand with the earlier tax debt, whether:

    1. the IRS/state is now aggressively collecting the taxes;
    2. you are currently paying them through an agreed monthly payment plan;
    3. you haven’t yet filed the tax returns for the prior years.

1. Dealing with Aggressive Collection of Earlier Tax Debt

The minute your bankruptcy lawyer files the Chapter 13 case for you all the aggressive tax collection actions will stop. That is the power of bankruptcy’s “automatic stay.” You will have 3 to 5 years to deal with ALL of your debts through a payment plan. This includes all your income taxes. The Chapter 13 payment plan will be based on what you can genuinely afford to pay. You may well not need to pay some of your earlier taxes. You will likely not need to pay any more accruing interest and penalties on ANY of the income taxes. You will not need to worry about tax collections throughout the time you’re in the case—including the recording of tax liens. At the completion of your case you will owe no income taxes.

2. In a Monthly Payment Plan

Are you already in a payment plan with the IRS/state for the prior tax debt?

In most cases, installment plans push you to your financial limits.  The end result is that you probably did not withhold enough to pay your current year taxes.  That digs you into a deeper hole and the IRS could care less.

Furthermore, you know that you’ll violate your installment agreement if you don’t stay current in future income taxes. As stated in IRS Form 9465, the Installment Agreement Request form, “you agree to meet all your future tax obligations.”

Chapter 13 avoids this trouble. As mentioned above, the “automatic stay” immediately protects you from the IRS/state. Your monthly installment plan is cancelled right away. You make no further payments on it once you file you file your Chapter 13 case. All your prior income taxes AND your 2018 one(s) are handled through your Chapter 13 payment plan. You get the financial advantages and the peace-of-mind referenced in the above section. When you successfully complete your Chapter 13 case you’ll be totally free of any tax debt.

3. Not Filing Tax Returns

You may be in the scary situation that you can’t pay your taxes so you don’t file your tax returns.

Or you may be in an installment payment plan and you don’t want to violate it by admitting you owe more for 2018. You know you’ll be in violation of it upon filing the 2018 tax return, so you simply don’t do so.

But you know that not filing your 2018 tax return (and any prior unfiled ones) only delays the inevitable. You’re in a vicious cycle in which you may well be falling further behind instead of getting ahead.

Chapter 13 can likely enable you to break out of that cycle. The vicious cycle is broken because your Chapter 13 budget will also address your 2019 and future income tax situation. It does so because your new budget will include enough withholding or quarterly estimated payments so you can stay current for 2019 and thereafter. Again, you should end the Chapter 13 plan being completely tax-debt free.

Save Your Sole Proprietorship Business through Chapter 13

Posted by Kevin on February 17, 2019 under Bankruptcy Blog | Comments are off for this article

“Adjustment of Debts of an Individual with Regular Income”

That is the formal name given to Chapter 13 of Title 11—the U. S. Bankruptcy Code.

As the word “Individual” indicates, you must be a person to file a Chapter 13 case—a corporation cannot file one. This also applies to a limited liability company (LLC) and other similar types of legal business entities.

But if you have a business which you operate as a sole proprietorship, you and your business can file a Chapter 13 case together.

The assets of your sole proprietor business are simply considered your personal assets. The debts of your business are simply your debts.

This is true even if your business is operated under an assumed business name or d/b/a.

Chapter 13 Helps Your Sole Proprietorship Business in 6 Major Ways

1) Chapter 13 addresses both your business and personal financial problems in one legal and practical package.  You are personally liable on all debts of your sole proprietorship business, as well as, of course, your individual debts. So as long as you qualify for Chapter 13 otherwise, you can simultaneously resolve both your business and personal debts.

2) Chapter 13 stops both business and personal creditors from suing you, placing liens on your assets, and shutting down your business. The “automatic stay” imposed by the filing of your Chapter 13 case stops ALL your creditors from pursuing you, including both business and personal ones. Your personal creditors are prevented from hurting your business, and your business creditors are prevented from taking your personal assets.

3) Chapter 13 enables you to keep whatever business assets you need to keep operating. If you do not file a bankruptcy, and one of either your business or personal creditors gets a judgment against you, it could try to seize your business assets.  Also, if you filed a Chapter 7 “straight bankruptcy,” under most circumstances you could not continue operating your business. However, Chapter 13 is specifically designed to allow you to keep what you need and continue operating your business.

4) Chapter 13 gives you the power to retain business and personal collateral which secure a business debt even if you are behind on payments. Chapter 13 will allow you to pay those arrearages over the term of the Chapter 13 plan which could be between 36-60 months usually with no interest.

5) If you have second or third mortgages of your personal residence which are completely underwater (e.g. residence worth $200,000 subject to a $225,000 first mortgage and a $60,000 home equity loan), Chapter 13 allows you to strip off the second mortgage and treat it like an unsecured date.  That means that the $60,000 second gets paid for pennies on the dollar from your monthly payments to the Chapter 13 trustee.  And if you successfully complete the Plan, the second mortgage must be cancelled of record.

6.  Business owners in financial trouble are generally also in tax trouble. Chapter 13 gives business owners time to pay tax debts that cannot be discharged (permanently written off), all the while keeping the IRS and other tax agencies at bay. Chapter 13 usually stops the accruing of additional penalties and interest, enabling the tax to be paid off much more quickly. Tax liens can be handled especially well. At the end of a successful Chapter 13 case you will have either discharged or paid off all your tax debts, and will be tax-free.

When a Chapter 7 “Straight Bankruptcy” Helps You Enough on Your Home

Posted by Kevin on February 11, 2019 under Bankruptcy Blog | Comments are off for this article

Chapter 13 Is a Powerful Package

If you want to keep your home but are behind on your mortgage payments, a Chapter 13 “adjustment of debts” is often what you need. It comes with an impressive set of tools to address many home debt problems. It gives you more time to catch up on the mortgage, may enable you to “strip” a second or third mortgage off your title, and gives you very helpful ways for dealing with property taxes, income tax liens, judgment liens, and such.

When Chapter 7 is Enough

But what if you have managed to fall only a few months behind on your mortgage, and could afford the payments if you just got relief from your other debts?

Or what if you aren’t even keeping the house, but do need a little more time to find another place to live?

Then you may not need a Chapter 13 case, and could save the extra time and cost that it would take compared to Chapter 7.

Buying Just Enough Time for What You Need

The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13.  So the filing of a Chapter 7 case stops a foreclosure just as quickly as a Chapter 13 filing.

But Chapter 7 usually buys you much less time than a Chapter 13 could.

If you are not very far behind on your mortgage payment(s) and want to keep your home, when you file a Chapter 7 case your mortgage lenders will usually give you several months to catch up on your back payments. You must immediately start making your regular monthly payments, if you had not been making them, and must enter a strict schedule for catching up on the arrearage. In return the lender agrees to hold off foreclosing, as long as you make the payments as agreed.

Where do you get the money to make these extra payments?  By discharging your pre-petition debt in the Chapter 7, it could free up hundreds of dollars per month.  The key, then, is to make sure that you use that money to pay the mortgage arrearage and not spend it on other items.

If instead, you are not keeping the house but just need to have more time to save money for moving into a rental home, a well-timed Chapter 7 case will buy you more time in your house. During that time you don’t pay mortgage payments, enabling you to get together first and last month’s rent payment, any necessary security deposit and other moving costs.

The tough-to-answer question is how much extra time would a Chapter 7 filing give you. It mostly depends on how aggressive your mortgage company is about trying to start or restart the foreclosure efforts.  A pushy lender could, soon after you file your case, ask the bankruptcy court for “relief from the stay”—permission to start or restart the foreclosure process. If so, then your bankruptcy filing would buy you only an extra month or so.

Or on the other extreme, a mortgage lender could potentially take no action during the 3-4 months or so until your Chapter 7 case is finished. At that point the “automatic stay” protection expires, and the lender can start or restart the foreclosure. Or it may sit on its hands even longer.  Your bankruptcy attorney will likely have some experience in how aggressive your particular mortgage lender is under facts similar to yours.

The Most Important Things to Know If You Get Sued by a Creditor

Posted by on February 4, 2019 under Bankruptcy Blog | Comments are off for this article

 

 

Most debts that people get behind on are at some point—often quite quickly—assigned by the original creditors to collection agencies. This can happen two ways. Either the creditor still owns the rights to the debt and the collection agency simply gets a percentage of what it collects, or the creditor sells all of its rights to the debt to a collection agency and then is legally no longer in the picture.

Either way, the collection agency then tries to get you to pay the debt.  At first—it will tend to  contact you and try to make you pay whatever it can. Depending on the facts of the situation—including whether you have a job or real estate or other assets—the collection agency will then decide whether it’s worth suing you. If you ARE sued, there’s a good chance that the collection agency believes it can force payment from you by garnishing your paycheck or bank account, or by putting a lien on your home or by attaching other assets.

This is a signal you need to pay attention right away.

In fact, the collection agency is banking on you not taking the lawsuit seriously enough. The sad truth is that a large majority of the time people don’t respond to lawsuits so that judgments are entered against them by default.

Don’t assume that there is nothing you can do. Learn your options.  How? Most consumer or bankruptcy attorneys will give you a free consultation.  This consult should provide you with the following:

a) You will understand the consequences of the lawsuit, and your options for dealing with it. Know what your options are instead of assuming you have none.

b) You may have defenses so that you don’t legally owe the debt after all. Collection agencies routinely try to collect debts on which the statute of limitations has expired. They can sue the wrong person. They may include allegations which are not accurate or supported by law.

c) You may have a counterclaim—an argument that the creditor acted illegally in some way and actually owes you money for damages. At the least this could give you leverage to settle the debt under much better terms.

d) Once the time to respond expires and a judgment is entered, it is usually too late to deny the allegations in the complaint.

e) By having an attorney review the lawsuit and your overall debt picture, and discuss your options, you may end up solving deeper problems. Most consumers do not have an attorney who they talk with regularly. So problems accumulate. You don’t have a chance to ask questions when they arise. This often leads to lots of confusion and anxiety. Seeing an attorney about a pending lawsuit could lead to addressing how to improve your entire financial life.

Final advice worth repeating- if you are sued, you must act quickly.  In NJ, you have only 35 days to respond to a lawsuit.

The Four Conditions for Writing Off Income Taxes in Bankruptcy

Posted by on February 1, 2019 under Bankruptcy Blog | Be the First to Comment

The Core Principle Behind the Four Conditions

There is a simple principle behind all four of these conditions: under bankruptcy law taxpayers should be able to write off their tax debts just like the rest of their debts, AFTER the IRS (or other tax authority) has a reasonable length of time to try to collect those taxes.

What’s a reasonable length of time in the eyes of the law?

The four conditions each measure this amount of time differently, based on the following:

1) when the tax return for the particular income tax was due,

2) when the tax return was actually filed,

3) when the tax was “assessed,” and

4) whether the tax return that was filed was honest and therefore reflected the right amount of tax debt when it was filed.

To discharge an income tax debt, it must meet all four of these conditions.

Here they are in order:

1) Three Years Since Tax Return Due:

All income taxes have a fixed due date for its return to be filed. That date may be delayed by a certain number of months if you asked for an extension, but it’s still a specific point in time. This first condition gives the tax authorities three years from the tax return filing date, or from the extended filing date if you asked for an extension. Note that this is fixed date, not affected by when you actually filed the return.

2) Two Years Since Tax Return Actually Filed:

This second condition is different than the first because it is a time period triggered by your own action, your filing of the tax return.

Note that you can file a tax return late and still be able to discharge the debt if at least two years have passed since you filed the return. (Caution: there are some parts of the country where some court opinions have questioned this—be sure to talk with your attorney about the law in your jurisdiction.)

3) 240 Days Since Assessment:

This third condition can be a bit confusing. It very seldom comes into play—most tax debts meet this condition without any problem.

Assessment is the tax authority’s formal determination of your tax liability. It usually happens in a straightforward way, when it receives, processes, and accepts your tax return.

Most of the time an income tax is assessed within a few days or weeks that it is received. So the period of time of 240 days after assessment usually passes long before the above three-years-since-the-return-is-due or two-year-since-tax-return-filed time periods.  Possible exceptions- lengthy audits, litigation or offers in compromise.

4) Fraudulent tax returns and tax evasion:

This last condition effectively means that the above time periods are not triggered at all if you are intentionally dishonest on your tax return or try to avoid paying the tax in some other way.

If your tax debt meets these four hoops, you should be able to discharge that tax in either a Chapter 7 or Chapter 13 bankruptcy.

If You Don’t Meet These Conditions

Then, for the most part, not dischargeable.  That means, not able to be written off.

The “Means Test” Tries to Be Objective

Posted by Kevin on January 28, 2019 under Bankruptcy Blog | Comments are off for this article

In a Chapter 7 bankruptcy, the debtor makes no payments and gets to keep her exempt assets.  For a vast majority of debtors, this means they get to keep all their assets.  The average Chapter 7 is completed in about 4 months

Creditors did not like this and lobbied for 20 years for a major overhaul of consumer bankruptcies.  The result was the 2005 revisions to the Bankruptcy Code which was supposed to force more debtors to file under Chapter 13 where monthly payments of 36-60 months are required.  This was accomplished by imposition of the “means test” -supposedly an objective way to decide who qualifies to file a Chapter 7 bankruptcy.

The “Objective” Rule

If you make under the median income for your State based on household size, you pretty much qualify for Chapter 7.  If your income is above median, you must deduct from your income a combination of actual expenses and average local, State and national expenses to come up with your monthly disposable income.

    1. If your monthly disposable income is less than $128.33, then you pass the means test and qualify for Chapter 7.
    2. If your monthly disposable income is between $128.33 and $214.17, then you go a step further: multiply that “disposable income” amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If that multiplied disposable income” amount is less than 25% of those debts, then you still pass the “means test” and qualify for Chapter 7.
    3. If EITHER you can pay 25% or more of those debts, OR if your monthly disposable income is $214.17 or more, then you do NOT pass the means test. With rare exceptions, that means that you cannot file under Chapter 7.

There is not much difference between $128.33 per month and $214.17 per month- about $86 per month.  Just enough for dinner for 2 at a decent restaurant.  But at the low end, you can get through bankruptcy in 4 months and make no payments.  At the high end, you make monthly payments for 3 to 5 years.

So where do these hugely important numbers come from?  The Bankruptcy Code actually refers to those numbers multiplied by 60—$7,700 and $12,850. When the law was originally passed in 2005 these amounts were actually $6,000 and $10,000 (therefore, $100 and $167 monthly), but they have been adjusted for inflation since then.

So where did those original $6,000 and $10,000 amounts come from?

They are basically arbitrary.  Maybe creditor lobbyists or congressional staffers floated the idea.  Who knows?   But, somewhere in the process Congress decided that it needed to use certain numbers, and those are the ones that made it into the legislation. It’s the law, regardless that there doesn’t seem to be any real principled reason for using those amounts.

The Bottom Line

Sensible or not, if your income is under the published median income amount, then you pass the “means test” and can proceed under Chapter 7.   But if you are over the median income amount, then the amount of your monthly disposable income largely determines whether you are able to file a Chapter 7 case.