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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.

Advantages of Paying Your 2018 Income Tax through Chapter 13

Posted by Kevin on January 21, 2019 under Bankruptcy Blog | Comments are off for this article

Say you owe $8000 on your 2018 federal taxes and have $18000 of credit card debt.  If you file under Chapter 7, you should discharge the $18,000 credit card debt, but you will owe the IRS $8000- and they will come after you.

Chapter 13 can help.

Payment of 2018 Income Taxes in Chapter 13 Case

Chapter 13 is a very flexible procedure, especially appropriate for taking care of income tax debt. If you file in 2019, your plan will include taxes owed in 2018.   In fact, that 2018 taxes (and any other years) income tax MUST be paid in full under the terms of your Chapter 13 plan. But the requirement that you pay that tax in full can be used to your advantage in a Chapter 13.

Basic Benefits

No matter what else is going on in your Chapter 13 case, you get three major benefits for paying your 2018 taxes through it.

1. The IRS (and any applicable state income tax agency) cannot harass you during the repayment process.

2. You have much more flexibility on the terms for paying the 2018 tax, including the ability to delay paying anything while focusing on even higher priorities (such as a home/vehicle/child support arrearage).

3. No additional interest or penalties are added while you are in the Chapter 13 case, so you will pay less while paying off the 2018 tax debt.

Paying Off Your 2018 Tax For Free

Sometimes the fact that you owe some recent income taxes can cost you absolutely nothing beyond what you would have had to pay anyway through your Chapter 13 case. How could this be?

The justification for this comes from the Chapter 13 requirement that you must pay all your “disposable income” into your plan each month during the required period of time. Usually that means that all your creditors are scheduled to receive a certain percent of the debt you owe them.  However,  priority creditors (including taxes) and secured creditors are paid first, and then whatever is left over is divided among the “general unsecured” creditors (credit cards).

An Example

Say you have disposable income of $300 per month, a 3 year plan and general unsecured debts of $18,000.  You have to pay into the plan (assuming no trustee or attorney fees for the sake of simplicity), $10,800 (36 months times $300 per month) which would go to “general unsecured” debts.

But now assume that you have a 2018 income tax debt of $8,000. You would still pay $300 per month for 36 months, but now the $8,000 income tax would be paid out first, reducing the amount paid out to the “general unsecured” creditors.  Those creditors would receive only $2,800 ($10,800 minus $8,000) out of the $18,000 owed to them, and you still get a discharge.

Since those 2018 taxes are not dischargeable, you, are, in effect, paying your taxes off the backs of your unsecured creditors.  And you not only discharge your credit card debt but you paid your taxes in full. Not bad.

You Can Write Off Some Income Taxes with Bankruptcy

Posted by Andy Toth-Fejel on November 11, 2018 under Bankruptcy Blog | Be the First to Comment

Chapter 7 vs. 13 for Income Taxes

Thinking that the only way to handle your income tax debts in bankruptcy is through Chapter 13 is a misunderstanding of the law. It’s an offshoot on the broader error that you can’t write off taxes in a bankruptcy.

Both are understandable mistakes.

It is true that some taxes cannot be discharged (legally written off) in bankruptcy. But some can.

And it is true that Chapter 13 can be the best way to solve many income tax problems. But that does not necessarily mean it is the best for you. Chapter 7 might be better.

When Chapter 13 Is Better

Chapter 13 tends to be the better option if you owe a string of income tax debts, and especially if some are relatively recent ones. That’s because in these situations Chapter 13 solves two huge problems in one package.

First, if you owe recent income taxes which cannot be discharged, you are allowed to pay those taxes over the term of your Chapter 13 plan (up to 60 months) usually avoiding most penalties and interest that would have accrued during the term of the plan. That can be a huge savings.  Moreover, you can often hold off on paying anything towards the back taxes while you first pay even more important debts—such as back child support.

Second, if you have older back taxes, under Chapter 13, you pay these taxes as general unsecured debt under your plan.   If you complete all payments under your plan and otherwise satisfy the requirements of Chapter 13  any remaining older taxes are discharged; i.e., wiped out.

When Chapter 7 is Better

But you don’t need the Chapter 13 package if all or most of your income tax debts are dischargeable. In that situation, the generally much simpler Chapter 7 could be enough.

So, what makes an income tax debt dischargeable under Chapter 7?

The Conditions for Discharging Income Taxes

To discharge an income tax debt in a Chapter 7 case, it must meet these conditions:

1) 3 years since tax return due: The tax return for the pertinent tax must have been due more than three years before you file your Chapter 7 case. Also, if you requested any extensions for filing the applicable tax returns, add that extra time to this three-year period.

2) 2 years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.

3) 240 days since “assessment”: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.

4) Fraudulent tax returns and tax evasion: You cannot file a “fraudulent return” or “willfully attempt in any manner to evade or defeat such tax.”

These four conditions and the procedure for utilizing them are a bit complicated.  Therefore, we advise that you retain an experienced bankruptcy attorney to assist you.

Understanding Debts- Part 1

Posted by Kevin on October 21, 2018 under Bankruptcy Blog | Comments are off for this article

 Debts in Bankruptcy

If you are thinking about bankruptcy there’s no more basic question than what it will do to each of your debts. Will it wipe away all your debts or will you still owe anybody? What about debts you would like to keep like your car or truck loan or your home mortgage? What help does bankruptcy give for unusual debts like taxes, or child and spousal support?

The Three Categories of Debts

At the heart of bankruptcy is the basic rule of treating all creditors within the same legal category the same. So we need to understand the three main categories of debts. You may not have debts in all three of these categories, but lots of people do. A basic understanding of these three categories will help make sense of bankruptcy, and make sense of how it treats each of your creditors.

The three categories of debts are “secured,” “general unsecured,” and “priority.”

Secured Debts

Every single debt is either “secured” by something you own or it is not. A secured debt is secured by a lien—a legal right against that property.

Most of the time you know whether or not a debt is secured because you voluntarily gave collateral to secure the debt. When you buy a car, you know that you are signing on to a vehicle loan in which the lender is put onto your car’s title as its lienholder. That lien on the title gives that lender certain rights, such as to repossess it if you don’t make the agreed payments.

But debts can also be secured as a matter of law without you voluntarily agreeing to it. For example, if you own a home and an unsecured creditor sues you and gets a judgment against you that usually creates a judgment lien against the title of your home. Or if you don’t pay federal income taxes you owe, the IRS may put a tax lien on all your personal property.

For a debt to become effectively secured, for purposes of bankruptcy, certain steps have to be taken to accomplish that. Otherwise the debt is not secured, and the creditor does not have rights against the property or possession that was supposed to secure the debt.

In the case of a vehicle loan, the lender and you have to go through certain paperwork for the lender to become a lienholder on the vehicle’s title. If those aren’t done right, the vehicle will not attach as collateral to the loan. That could totally change how that debt is treated in bankruptcy.

Finally, it’s important to see that debts can be fully secured or only partly secured. This depends on the amount of the debt compared to the value of the collateral securing it. If you owe $15,000 on a vehicle worth only $10,000, the debt is only partly secured—secured as to $10,000, and unsecured as to the remaining $5,000 of the debt. A partly secured debt may be treated differently in bankruptcy than a fully secured one.

In the next blog we will be reviewing general unsecured debts and priority debts.

 

Your Bankruptcy Options If You Owe Income Taxes After Closing Your Business

Posted by Kevin on May 14, 2018 under Bankruptcy Blog | Comments are off for this article

Most people who close down a failed small business owe income taxes. Chapter 7 and Chapter 13 provide two very different solutions.

 

Here are the two options:

Chapter 7 “Straight Bankruptcy”

File a Chapter 7 case to discharge (permanently write off) most of your debts.  This can include some or even all of your income taxes. If you cannot discharge all of your taxes, right after your Chapter 7 is completed, you (or your attorney or accountant) would arrange a payout plan (either lump sum or over time) with the IRS or other taxing authorities.

Chapter 13 “Adjustment of Debts”

File a Chapter 13 case to discharge all the other debts that you can, and sometimes some or even all the taxes. If you cannot discharge a significant amount of your taxes, you then pay the remaining taxes through your Chapter 13 plan, while under continuous protection of the automatic stay against the IRS’s or state’s collection efforts.

The Income Tax Factor in Deciding Between Chapter 7 and 13

In real life, especially after a complicated process like closing a business, often many factors come into play in deciding between Chapter 7 and Chapter 13. But focusing here only on the income taxes you owe, the choice could be summarize with this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case (if any) be small enough so that you could reliably make workable arrangements with the IRS/state to pay off or settle that obligation within a reasonable time?  If so, consider Chapter 7.  If not, then consider Chapter 13 which provides the automatic stay during the 5 year period allowed to pay taxes.

How Do You Know?

To find out whether you need Chapter 13 protection, you need to find out from your attorney the answers to two questions:

1) What tax debts will not be discharged in a Chapter 7 case?

2) What payment or settlement arrangements will you likely be able to make with the taxing authority to take care of those remaining taxes?

The IRS has some rather straightforward policies about how long an installment plan can last and how much has to be paid. In contrast, predicting whether or not the IRS/state will accept a particular “offer-in-compromise” to settle a debt can be much more difficult to predict.  Generally, it takes more attorney or accountant time to negotiate an offer in compromise, so the cost factor to the debtor should be considered.

When in doubt about whether you would be able to pay what the taxing authorities would require after a Chapter 7 case (either by installment plan or offer in compromise), or in doubt about some other way of resolving the tax debt, you may well be better off under the protections of Chapter 13.

 

 

Choosing the Right Solution in a Closed-Business Bankruptcy Case

Posted by Kevin on March 28, 2018 under Bankruptcy Blog | Comments are off for this article

Whether to file under Chapter 7 or Chapter 13 depends largely on your business assets, taxes, and other nondischargeable debts.

You have closed down your business and are considering bankruptcy.  What are your options?

If you operated as a sole proprietor (DBA), then all the debts of the business are your personal debts.  If you operated as a corporation or LLC, then the business was a separate entity.  So, the business entity is liable for its debts, then, absent fraud, you are liable only for those debts which you personally guaranteed.  In addition, you personally may be liable to taxing authorities for certain taxes.

Then, you have to consider remaining assets of the business.  If a DBA, then you own the assets which become part of your bankruptcy estate upon filing.  If it a corporation or LLC, then the entity owns the assets.  But if you are the 100% owner of the business, then the stock or other ownership interest is an asset of the bankruptcy estate.  So, the trustee can get to the assets through your ownership interest.

Your options would be to file under Chapter 7 or Chapter 13.  A Chapter 7 is generally over in 4-5 months and requires no payments.  A Chapter 13 lasts from 36-60 months and requires payments each month.  It would be understandable if you preferred to file under Chapter 7.

Likely Can File Under Chapter 7 Under the “Means Test”

The “means test” determines whether, with your income and expenses, you can file a Chapter 7 case.  The “means test” will still not likely be a problem if you closed down your business recently. That’s because the period of income that counts for the “means test” is the six full calendar months before your bankruptcy case is filed. An about-to-fail business usually isn’t generating much income. So, there is a very good chance that your income for “means test” purposes is less than the published median income amount for your family size, in your state. If your prior 6-month income is less than the median amount, by that fact alone you’ve passed the means test and qualified for Chapter 7.

Three Factors about Filing Chapter 7 vs. 13—Business Assets, Taxes, and Other Non-Discharged Debt

The following three factors seem to come up all the time when deciding between filing Chapter 7 or 13:

1. Business assets: A Chapter 7 case is either “asset” or “no asset.” In a “no asset” case, the Chapter 7 trustee decides—usually quite quickly—that all of your assets are exempt (protected by exemptions) and so cannot be taken from you to pay creditors.

If you had a recently closed business, there more likely are assets that are not exempt and are worth the trustee’s effort to collect and liquidate. If you have such collectable business assets, discuss with your attorney where the money from the proceeds of the Chapter 7 trustee’s sale of those assets would likely go, and whether that result is in your best interest compared to what would happen to those assets in a Chapter 13 case.

2. Taxes: It seems like every person who has recently closed a business and is considering bankruptcy has tax debts. Although some taxes can be discharged in a Chapter 7 case, many cannot. Especially in situations in which a lot of taxes would not be discharged, Chapter 13 is often a better way to deal with them.

3. Other nondischargeable debts: Bankruptcies involving former businesses get more than the usual amount of challenges by creditors. These challenges are usually by creditors trying to avoid the discharge (legal write-off) of its debts based on allegations of fraud or misrepresentation. The business owner may be accused of acting in some fraudulent fashion against a former business partner, his or her business landlord, or some other major creditor.  These kinds of disputes can greatly complicate a bankruptcy case, regardless whether occurring under Chapter 7 or 13. But in some situations Chapter 13 could give you certain legal and tactical advantages over Chapter 7.

 

 

Chapter 13 Handles Both Older and Newer Income Tax Debts

Posted by Kevin on April 3, 2017 under Bankruptcy Blog | Be the First to Comment

Same facts as previous blog.

  • Without a bankruptcy, a couple would have to pay about $30,000 to the IRS for back taxes, plus about another $45,000 in medical bills and credit cards, a total of about $75,000.
  • Under Chapter 13, this same couple would pay only about $18,000—36 months of $500 payments.

How Does Chapter 13 Work to Save So Much on Taxes and Other Debts?

  • Tax debts that are old enough are grouped with the “general unsecured” debts—such as medical bills and credit cards. These are paid usually based on how much money there is left over after paying other more important debts. This means that often these older taxes are paid either nothing or only a few pennies on the dollar.
  • The more recent “priority” taxes DO have to be paid in full in a Chapter 13 case, along with interest accrued until the filing of the case. However: 1) penalties—which can be a significant portion of the debt—are treated like “general unsecured” debts and thus paid little or nothing, and 2) usually interest or penalties stop when the Chapter 13 is filed.
  • “Priority” taxes—those more recent ones that do have to be paid in full—are all paid before anything is paid to the “general unsecured” debts—the medical bills, credit cards, older income taxes and such. In many cases this means that having these “priority” taxes to pay simply reduces the amount of money which would otherwise have been paid to those “general unsecured” creditors. As a result, in these situations having tax debt does not increase the amount that would have to be paid in a Chapter 13 case, which is after all based on what the debtors can afford. In our example, the couple pays $500 per month because that is what their budget allows.
  • The bankruptcy law that stops creditors from trying to collect their debts while a bankruptcy case is active—the “automatic stay”—is as effective stopping the IRS as any other creditor. The IRS can continue to do some very limited and sensible things like demand the filing of a tax return or conduct an audit, but it can’t use the aggressive collection tools that the law otherwise grants to it.

Deciding Between Chapter 7 and 13 for Income Taxes

If, unlike the example, all of the taxes were old enough to meet the conditions for discharging them under Chapter 7, there would be no need for a Chapter 13 case (but may require additional work in a Chapter 7).  On the other hand if more “priority” tax debts had to be paid than in the example, the debtors would have to pay more into their Chapter 13 plan, either through larger monthly payments or for a longer period of time.

There are definitely situations where it is a close call choosing between Chapter 7 or Chapter 13. And sometimes preparing an offer in compromise with the IRS—either instead of or together with a bankruptcy filing—is the best route. To decide which of these is best for you, you need the advice of an experienced bankruptcy attorney to help you make an informed decision and then to execute on it.

 

Chapter 13 Handles Tough Income Tax Debts

Posted by on March 30, 2017 under Bankruptcy Blog | Be the First to Comment

If you owe recent income taxes, or multiple years of taxes, Chapter 13 can provide huge advantages over Chapter 7, and over other options.

The Example

Consider a husband and wife with the following scenario:

  • Husband lost his job in 2008, so he started a business, which, after a few promising years in which it generated some income, failed in late 2012.
  • The wife was consistently employed throughout this time, with pay raises only enough to keep up with inflation.
  • They did not have the money to pay the quarterly estimated taxes while husband’s business was in operation, and also could not pay the amount due when they filed their joint tax returns for 2008, 2009, 2010, 2011 and 2012. To simplify the facts, for each of those five years they owe the IRS $4,000 in taxes, $750 in penalties, and $250 in interest. So their total IRS debt for those years is $25,000—including $20,000 in the tax itself, $3,750 in penalties, and $1,250 in interest.
  • Husband found a reliable job six months ago, although earning 20% less than he did at the one he lost before he started his business.
  • They filed every one of their joint tax returns in mid-April when they were due, and have been making modest payments on their tax balance when they have been able to.
  • They have no debts with collateral—no mortgage, no vehicle loans.
  • They owe $35,000 in medical bills and credit cards.
  • They can currently afford to pay about $500 a month to all of their creditors, which is not nearly enough to pay their regular creditors, and that’s before paying a dime to the IRS.
  • They are in big financial trouble.

Without Any Kind of Bankruptcy

  • If they tried to enter into an installment payment plan with the IRS, they would be required to pay the entire tax obligation, with interest and penalties continuing to accrue until all was paid in full.
  • The IRS monthly payment amount would be imposed likely without regard to the other debts they owe.
  • If the couple failed to make their payments, the IRS would try to collect through garnishments and tax liens.
  • Depending how long paying all these taxes would take, the couple could easily end up paying $30,000 to $35,000 with the additional interest and penalties.
  • This would be in addition to their $35,000 medical and credit card debts, which could easily increase to $45,000 or more when debts went to collections or lawsuits.
  • So the couple would eventually end up being forced to pay at least $75,000 to their creditors.

Under Chapter 13

  • The 2008 and 2009 taxes, interest and penalties would very likely be paid nothing and discharged at the end of the case. Same with the penalties for 2010, 2011, and 2012. That covers $11,500 of the $25,000 present tax debt.
  • The remaining $13,500 of taxes and interest for 2010, 2011, and 2012 would have to be paid as a “priority” debt, although without any additional interest or penalties once the Chapter 13 case is filed.
  • Assuming that their income qualified them for a three-year Chapter 13 plan, this couple would likely be allowed to pay about $500 per month for 36 months, or about $18,000, even though they owe many times that to all their creditors.
  • This would be enough to pay the $13,500 “priority” portion of the taxes and interest, plus the “administrative expenses” (the Chapter 13 trustee fees and your attorney fees).
  • Then after three years of payments, they’d be completely done. The “priority” portion of the IRS debt would have been paid in full, but the older IRS debt and all the penalties would be discharged (written off), likely without being paid anything. So would the credit card and medical debts.

After the three years, under Chapter 13 the couple would have paid a total of around $18,000, instead of eventually paying at least $75,000 without the Chapter 13 case. They’d be done—debt-free—instead of just barely starting to pay their mountain of debt. And they would have not spent the last three years worrying about IRS garnishments and tax liens, lawsuits and harassing phone calls, and the constant lack of money for necessary living expenses.

The next blog post will follow up on this theme.

 

The Persistent Myth About Taxes and Bankruptcy

Posted by Kevin on March 29, 2017 under Bankruptcy Blog | Be the First to Comment

Many people believe that bankruptcy can’t write off any income taxes. In fact, it is not uncommon for non-bankruptcy attorneys to lump taxes in with other priority debts like alimony and child support payments (which are not dischargeable) and student loans (which are dischargeable in bankruptcy upon a showing of undue hardship).

Through the next few blog posts, you’ll learn what taxes can be discharged and what can’t. The fact is that bankruptcy can discharge taxes of many types and in many situations. Sometimes ALL of a taxpayer’s taxes can be discharged, or most of them. But there ARE significant limitations, which I will explain carefully in those blogs.

Besides the possibility that you may be able to discharge some or all of your taxes, bankruptcy can also:

1. Stop tax authorities from garnishing your wages and bank accounts, and levying on (seizing) your personal and business assets.

2. Prevent post petition accrual of interest and penalties in certain situations.

3. If paid through a plan, limits your payments to what is affordable as opposed to what the taxing authority demands.

4. Eliminate other debts so that money is available to pay the taxing authority.

Overall, bankruptcy gives you unique leverage against the IRS and/or your state or local tax authority. It gives you a lot more control over a very powerful class of creditors. Your tax problems are resolved not piecemeal but rather as part of your entire financial package. So you don’t find yourself focusing on your taxes while worrying about the rest of your creditors.

The laws relating to taxes and bankruptcy are somewhat complex and not easily handled by “do it your selfers”.  It is recommended that a prospective debtor seek out an attorney with experience in taxes and bankruptcy.

 

Note I mentioned students loans above.  If that is your issue, you can contact me on this website or on http://studentdebtnj.com

 

Timing is Important When it Comes to Filing Bankruptcy

Posted by on July 22, 2016 under Bankruptcy Blog | Be the First to Comment

 

 

Many of the laws about bankruptcy are time-sensitive. When your case is filed can have significant consequences. This blog will address how timing of a bankruptcy filing can effect what debts can be discharged.

Income Taxes Can Be Discharged, with the Right Timing

Federal and state income taxes are forever discharged if you meet a number of conditions. Two of the most important of these conditions are met by just waiting long enough before filing your bankruptcy case:

  • Three years must have passed since the time that the tax return for that tax was due (plus any extension if you asked for one).
  • Two years must have passed since you actually filed the pertinent tax return.

For example, assume a taxpayer owes $10,000 to the IRS for the 2009 tax year. She had asked for an extension to file that year to October 15, 2010, but then did not actually file that tax return until October 31, 2011. The above 3-year condition is met after October 15, 2013, because that is three years after the tax return was due. But the 2-year condition has to be met as well, which would not occur until after October 31, 2013, two years after the actual tax return filing date. So filing a bankruptcy case on or before October 31, 2013 would leave that $10,000 tax debt still owing; filing on November 1, 2013 or after would result in it being discharged forever. Simply waiting this one day makes a difference of $10,000.

Now, there are other conditions involved in getting taxes discharged.  So, it would be wise to seek professional help.

 

Use Chapter 7 or Chapter 13 to Resolve Your Tax Debts from a Closed or About-to-Close Business

Posted by on August 15, 2015 under Bankruptcy Blog | Comments are off for this article

If you had struggled to keep a business open, but have decided to throw in the towel, there’s a good chance you owe taxes. Here’s how to deal with them.

 

The Basic Choice

Let’s assume that you are seriously considering filing bankruptcy, but want to know your options.

You have two choices within bankruptcy for addressing tax debts after closing down a small business:

1. File a Chapter 7 case to discharge (legally write-off) all the debt that you can, which may include some of your tax debt, and then deal directly with the IRS and any other tax authorities to either pay the rest of the taxes in monthly installment payments or to negotiate a settlement (called an Offer in Compromise in the case of the IRS).

2. File a Chapter 13 case to deal with all your debts, which again may include the discharge of some of your tax debt, while you pay the rest of the taxes through a court-approved Chapter 13 plan, and being protected throughout the process from collection actions by the IRS and any other tax authorities.

Putting aside the many factors distinct from taxes, choosing between Chapter 7 or 13 comes down to this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case be small enough so that you could reliably make reasonable payments to the Internal Revenue Service (or other tax authority) which would satisfy that obligation within a sensible time period?

Answering that Question

The idea is that Chapter 7 is likely the way to go if you don’t need the long-term protection that comes with Chapter 13. In a Chapter 7 case, once that case is completed—usually only about three to four months after it is filed—the IRS/state can resume collection activity on the taxes that were not discharged in bankruptcy. You clearly want to avoid that. So a Chapter 7 makes sense ONLY IF before any collection activity begins you have arranged with the IRS/state to make payments, and 1) those payments are reasonable in amount, 2) your circumstances are stable enough so that you are confident that you will be able to pay them consistently, and 3) the length of time you would be making payments does not stretch out so long that the interest and penalties get too high.

Your attorney will be able to tell you—usually with high reliability—which tax debts will and will not be discharged in a Chapter 7 case, and thus how much in taxes you still owe. Then the next step is determining what the IRS/state would require you to pay in monthly payments, or possibly would accept in settlement. Your bankruptcy attorney may be able to give you guidance about this, or may need to refer you to a tax  specialist (usually an accountant). Once you know the likely monthly installment payment amount—assuming you go that route—then you need to seriously consider whether that would be an amount you could reliably, reasonably pay, without incurring too much in interest and penalties before you paid it off.

If so, Chapter 7 likely is more appropriate. If not, then Chapter 13 is likely better because it gives you much more protection.

 

The “Automatic Stay” Applied to the IRS

Posted by on August 11, 2015 under Bankruptcy Blog | Comments are off for this article

The IRS is just another creditor that you can get immediate protection from by filing bankruptcy. With some exceptions.

 

The “Automatic Stay”

The filing of a bankruptcy case—either Chapter 7 or 13—triggers one of the most powerful tools of bankruptcy—the “automatic stay.” That’s the aggressively protective law that goes into effect 1) automatically the instant your bankruptcy case is filed at court 2) to stay—which means stop—all collection activity against you and against any of your assets.

The Bankruptcy Code includes a list of what creditors cannot do because of the “automatic stay.” Here are some of them (focusing on those readily applicable to the IRS):

  • start or continue a lawsuit or administrative proceeding to recover a debt you owe
  • take possession or exercise control over property you own as of the time your bankruptcy is filed
  • create or enforce a lien against such property
  • collect by any means any debt that existed before the bankruptcy filing

Applied to the IRS

The IRS and similar state agencies are certainly not treated like your conventional creditors when it comes to the discharge (legal write-off) of your debts. But in most respects they ARE treated the same for purposes of the “automatic stay.”

The Bankruptcy Code says that the “automatic stay” “operates as a stay, applicable to all entities.” (11 U.S.C. Section 362 (a).)  Is the IRS an “entity”? The Code explicitly defines that term to include “governmental unit.” (Section 101(15).) So the IRS and all tax collecting “governmental units” are governed by the “automatic stay.”

What If the IRS Still Tries to Collect

Just like any other creditor, the IRS can get slapped pretty hard if it violates the “automatic stay” by continuing to collect on a debt or taking any other of the forbidden actions. If you are
“injured by any willful violation of [the automatic] stay… [you] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages” against the IRS. (Section 362(k).) Indeed on occasion the IRS HAS been slapped hard. It now tends to follow the law and respect the “automatic stay” quite faithfully.

Special Exceptions to the “Automatic Stay” for “Governmental Units”

The IRS and state tax agencies do have some specialized exceptions—things they can continue doing in spite of your bankruptcy filing. (Section 362(b)(9).) But these are sensible exceptions that apply more to the determination of amount of a tax debt than to its actual collection. These tax agencies can demand that you file your tax returns, can make an assessment of the tax and tell you how much you owe, and can do an audit to figure out the amount you owe. They cannot create a tax lien or take any other collection action.

Interesting Historical and Personal Facts about Income Taxes

Posted by on June 11, 2015 under Bankruptcy Blog | Comments are off for this article

 

Did You Know…

  • The first income tax was enacted during the Civil War, but it expired a few years after the war ended.
  • The first peacetime income tax was passed in 1894, an effort of the Populists to get the wealthy to pay a greater share of the cost of the national government. It was a two percent tax on incomes over $4,000 (worth about $108,000 in today’s dollars), which at the time affected only about the top two percent of wage earners.
  • The next year the U.S. Supreme Court overturned this law as unconstitutional, in a 5-4 decision. Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 161 (1895).
  • A constitutional amendment to allow an income tax was proposed by the Republican President William Howard Taft, and the resolution for that amendment was passed by Congress with the Republicans in control of both the Senate and the House of Representatives.
  • The entire Sixteenth Amendment states: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”
  • After the required 3/4ths of state legislatures (36 of the 48 then-existing states) ratified it, on February 25, 1913 the Sixteenth Amendment was proclaimed ratified and became part of the Constitution.

So February 25, 2013 was the 100 year anniversary of the income tax becoming constitutional. Funny, I don’t remember any anniversary celebrations!

The MOST Interesting Facts

As the blogs in this series on taxes have been describing, bankruptcy can help you with income tax debts in a variety of ways. If it’s true that in life the facts that are most interesting to you are those that are going to help your pocketbook, then check out the following facts:

  • Some income taxes CAN be forever discharged (legally written off).
  • Taxes can be discharged under either Chapter 7 or Chapter 13, depending on which is right for you based on your other circumstances.
  • The protection from creditors you receive by filing bankruptcy—the “automatic stay”—protects you from the IRS (and other tax creditors) like any other creditor.
  • In a Chapter 13 payment plan, that protection can last for 3 to 5 years, giving you that much time to pay taxes that can’t be discharged.
  • Even if you owe a tax that can’t be discharged, a Chapter 7 bankruptcy can put you in a much better position afterwards either to enter into a payment plan or negotiate a settlement.
  • Chapter 13 usually stops accruing interest and penalties on tax debts that can’t be discharged, reducing the overall amount you have to pay.
  • If you owe a number of years of income taxes, Chapter 13 is often an excellent tool because all your taxes—as well as all your other debts—are handled in one tidy package.

Taxes and bankruptcy DO mix, often greatly in your favor.

Using Chapter 13 for All the Advantages it Gives You For Completely Resolving Your Income Tax Debts

Posted by on May 30, 2015 under Bankruptcy Blog | Comments are off for this article

If you can’t discharge your income tax debt through Chapter 7, or make workable payment arrangements on the remaining tax debt, then Chapter 13 can be a good solution.

 

The Previous Chapter 7 Options

 

A consistent theme through these past blogs has been that in many situations you do not need to incur the extra expense and time of going through a three-to-five-year Chapter 13 case when other solutions will work. But Chapter 13 IS often an excellent mechanism for resolving all your income tax debts (and usually all your other debts, too).

Chapter 13 Can Be the Easiest Way to Address Your Income Tax Debts

A Chapter 13 payment plan is often a significantly easier way to deal with income tax debts than the other alternatives because:

1. The payment amount going to the taxes are often more reasonable than the IRS/state would require. That’s because they are based on what you can actually afford, by allowing you more reasonable amounts for your expenses.

2. Your Chapter 13 case incorporates ALL your debts in one package, so that you are not forced to satisfy the IRS/state to the exclusion of other important creditors (such as your mortgage, vehicle payments, and child/spousal support). The taxes may have to wait their turn to be paid after debts that are a higher priority for you, instead of just getting paid first.

3. Putting all your debts into one Chapter 13 package also includes all categories of your income taxes—particularly those that are being discharged and those that aren’t. This avoids the situation under Chapter 7 in which you discharge some of the taxes but then have to deal directly with the IRS/state for the taxes that were not discharged.

4. The payments going to the IRS/state can be adjusted during the course of the Chapter 13 if your circumstances change, usually without much room for their objection.

Chapter 13 Can Be a Cheaper Way to Pay Non-Discharged Taxes

It can be cheaper because:

1. In contrast to the other scenarios, under Chapter 13 usually no more interest and penalties can be added after the case is filed.

2. Often you don’t have to pay even the previously accrued penalties.

3. If you have a tax lien attached to any of your tax debts, the lien can sometimes be paid off more cheaply by paying the secured value of the lien instead of the full tax.

If your tax debt is high, and you are paying into your plan for the full five years, these savings can amount to many thousands of dollars.

Chapter 13 Is a Safer Way to Pay Non-Discharged Taxes

It’s safer because:

1. Instead of being at the mercy of the IRS/state if you are not able to make a payment, under Chapter 13 your “automatic stay” protection from all your creditors—including tax creditors—persists throughout your case. So you are not a hair-trigger away from being hit with tax liens, or levies on your wage and bank accounts.

2. You CAN lose this protection, but if you and your attorney deal with your situation proactively you can usually preserve it.

3. This protection is particularly important when your circumstances change—instead of being at the mercy of the IRS/state, your attorney can make adjustments to your Chapter 13 plan. Or if necessary, even more aggressive or creative steps may be appropriate, such as changing to a new bankruptcy case. The point is that you usually have much more control over the situation.

Paying Part or All of Your Income Tax Debt through an “Asset” Chapter 7 Case

Posted by on May 24, 2015 under Bankruptcy Blog | Comments are off for this article

Give gladly to your Chapter 7 trustee assets that you don’t need, if most of the proceeds from sale of those assets are going to pay your taxes.

 

We are in a midst of a series of blogs about bankruptcy and income taxes. Today we describe a procedure that doesn’t happen very often, but in the right circumstances can work very nicely.

Turning Two “Bad” Events into Your Favor

Most of the time when you file a Chapter 7 “straight bankruptcy,” one of your main goals is to keep everything that you own, and not surrender anything to the Chapter 7 trustee. To that end, your attorney will usually protect everything you own with appropriate property “exemptions.”

If instead something you own can’t be protected, and so must be surrendered to the Chapter 7 trustee, that’s often considered a “bad” thing because you’re losing something.

And that leads to a second “bad” thing—the trustee selling that “non-exempt” property and using the proceeds to pay your creditors.  That usually does you no good because those creditors which receive payment from the trustee usually are ones that are being written off (“discharged”) in your Chapter 7 case, so you’d have no legal obligation to pay anyway.

But it may well be worth giving up something you own—particularly if it is something not valuable to you in your present circumstances—if doing so would have the consequence of paying some or all of your income tax debt that isn’t being written off in your Chapter 7 case.

Circumstances in which the Trustee would Pay Your Income Taxes

Consider the combination of the following two circumstances:

1)      You own something not protected by the applicable property “exemptions,” which you either don’t need or is worth giving up considering the other alternatives.

2)      The proceeds from the trustee’s sale of your “non-exempt” asset are mostly going to be paid towards taxes which otherwise you would have to pay out of your own pocket.

Let’s look at these two a little more closely.

“Non-Exempt” Assets You Don’t Need or Are Worth Giving Up

Although most people filing bankruptcy do NOT own any “non-exempt”—unprotected—assets, there are many scenarios in which they do. In some of those scenarios, those assets are genuinely not needed or wanted, so giving them to the trustee is easy. For example, a person who used to run a now-closed business, and still owns some of its assets, may have absolutely no use for those business assets. Or a person may own a boat, or an off-road vehicle, or some other recreational vehicle, but because of health reasons can no longer use them.

More commonly, a person may own a “non-exempt” asset which he or she would prefer to keep, but surrendering it to the trustee is much better than the alternative. That alternative is often filing Chapter 13—the three-to-five year payment plan. In the above example of a boat owned by somebody who can no longer use it, he or she may have a son-in-law who would love to use that boat. But that would probably not be worth the huge extra time and likely expense of going through a Chapter 13 case.

Allowing Your Trustee to Pay Your Non-Discharged Income Taxes

Letting go of your unnecessary or non-vital assets makes sense if most of the proceeds of the trustee’s sale of those assets would go to pay your non-dischargeable income taxes. Under what circumstances would that happen?

The Chapter 7 trustee is required by law to pay out the proceeds of sale of the “non-exempt” assets to the creditors in a very specific order. If you don’t owe any debts which have a higher “priority” than your income taxes, then the taxes will be paid in full, or as much money as is available, ahead of other creditors lower in order on the list.

The kinds of debts which are AHEAD of income taxes on this priority list include:

  • Child and spousal support arrearage
  • Wages, salaries, commissions, and employee benefits earned by your employees (if any) during the 180 days before filing or before the end of the business, up to $10,000
  • Contributions to employee benefit plans, with certain limitations

If you know that you do not owe any of these higher “priority” debts, then the trustee will pay your taxes (after paying the trustee’s own fees), to the extent funds are available, assuming the tax creditor files a “proof of claim” on time specifying the tax debt.

As you can imagine, each step of this process must be carefully analyzed by your attorney to see if it is feasible, and if so then it must be planned and implemented by your attorney. Again, it will only work in very specific circumstances. But when the stars are aligned appropriately, this can be a great way to get your taxes paid.

Chapter 7 Bankruptcy Helps You SETTLE Your Income Tax Debt

Posted by on April 30, 2015 under Bankruptcy Blog | Comments are off for this article

The last blog was about using Chapter 7 to discharge all or most of your debts other than taxes, so that afterwards you could afford to pay off the taxes through monthly payments to the IRS and/or the state. Or if you needed more payment flexibility, the usual alternative would be a Chapter 13 payment plan.

But there’s another possibility.

What if Neither Chapter 7 + Tax Payment Plan, Nor a Chapter 13 Will Work?

You may need a bankruptcy no matter what, to deal with debts other than taxes. But a Chapter 7 case may leave you owing too much income tax to be able to afford the minimum monthly payments that the IRS or the state would require. And a Chapter 13, as helpful as it can be for dealing with tough tax problems, may not be helpful enough. Chapter 13 requires payment in full of all “priority” debts—which includes non-dischargeable taxes—during the life of the case. That means a maximum of 5 years. You may just not have enough money available to pay into a Chapter 13 plan to do that.

So your best option may be to file a bankruptcy and then try to settle with the IRS and/or the state for less than you owe them.

Chapter 7 + Tax Settlement

A tax settlement would often be done in conjunction with and after a Chapter 7 bankruptcy filing, for three reasons: 

1. If you owe a bunch of taxes, you are extremely likely to also owe lots of other debts, which need to be dealt with through bankruptcy.

2. Some of your older tax debts may be dischargeable. Trimming that debt away with a Chapter 7 bankruptcy would reduce the amount of remaining tax debt to be settled.

3. With an IRS Offer in Compromise or similar state procedure, you would need to show that you are pretty much focusing all your available financial resources on the settlement. It usually helps to get rid of your other debts to be able to do that.

Clean Your Slate of Other Debts So You Can Settle Your Taxes

You may owe too much in nondischargeable taxes to be able to make either the minimum permitted tax installment payments after the Chapter 7 case, or the necessary Chapter 13 plan payments. Then you may not have much choice except to attempt a tax settlement after completing a Chapter 7 case. (You generally cannot attempt an Offer in Compromise while in a Chapter 13 case.)

But even if you don’t seem to have much choice, before filing your Chapter 7 case you should still have a good idea what the IRS/state might accept once you make the offer a few months later. The basic settlement standard with the IRS is, as stated on its website, that “the amount offered represents the most we can expect to collect within a reasonable period of time.” Determining what that means in your situation, and so whether a particular settlement offer will fly, are delicate judgment calls, which is why you need to work with an experienced professional. Talk with your bankruptcy attorney about whether he or she regularly negotiates IRS Offers in Compromise and/or tax settlements with the state. If not, get a referral to a tax attorney or accountant who does.

A Chapter 7 “Straight Bankruptcy” Can . . . Help You Deal with Taxes from Your Closed Business

Posted by Kevin on October 12, 2014 under Bankruptcy Blog | Comments are off for this article

Chapter 7 can legally write off some business-related taxes, and put you in a good position to take care of the rest.

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Although Chapter 13 can be the best way to handle taxes owed from running a business, not necessarily. Sometimes Chapter 7 is the better solution. Through it, you may be able to discharge some or all of your income tax debts, or maybe at least clean up your debts enough so that you can realistically take care of the remaining taxes.

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If you own, or recently owned, a business that is failing or failed, you likely have a more complicated financial situation than people with just regular consumer debts. You may have heard that the Chapter 13 “adjustment of debts” type of bankruptcy often deals better with messy situations. But you’ve also heard that this option takes three to five years, and that doesn’t appeal to you. However you might also think that the comparatively quick and straightforward Chapter 7 is not up to the task. But it just might be.

In deciding whether a Chapter 7 is right for you in this kind of situation, the main considerations are the kind of debts and the kind of assets you have. We first get into the debt issues, starting today with taxes.

Business Debts…

Chapter 7 tends to be the better solution if most or all of your debts are of the kind that will be discharged—legally written off—leaving you with little or no debt. Chapter 13 is often better if you have debts that are NOT going to be discharged—especially taxes—because it can give you major leverage over those debts. It protects you from them while giving you a sensible way to pay them.  So let’s look at this in the context of tax debts.

… Personal Income and “Trust Fund” Taxes

It seems inevitable—people who been running a struggling business almost always owe back taxes. As a small business hangs in there month after month, year after year, often there just isn’t enough money for the self-employed owner to pay the quarterly estimated income taxes, and then not enough money to pay the tax when it’s time to file the annual tax return. Tax returns themselves may not be filed for a year or two or more.

And if the owner was being paid as an employee of the business, or if the business had any other employees, it may have withheld employee income tax and Social Security/Medicare from the paychecks but then did not pay those funds to the IRS and the state/local tax authority. These are the so-called “trust fund” taxes, for which the business owner is usually held liable, and which can never be discharged in bankruptcy.

If you have a significant amount of tax debt, and especially if it includes “trust fund” taxes, and/or the taxes you owe span a number of years, Chapter 13 may be better for a number of reasons. Mostly, it can protect you and your assets while you pay the IRS or other tax authority based on your actual ability to pay instead of according to whatever their rules dictate. And you often have the power to pay other higher-priority debts at the same time or even ahead of the taxes, allowing you to hang onto a vehicle or catch up on child support, and such.

But you don’t always need that kind of Chapter 13 help, so don’t take the Chapter 7 option off the table without considering it closely. Keep these two points in mind:

First, personal income taxes which are old enough and meet a number of other conditions can be discharged in Chapter 7.  That could either eliminate your tax debt—if you closed your business a while ago and your taxes are all from a few years ago—or at least reduce it to a more manageable amount.

Second, regardless whether you can discharge any taxes, if you know that you will continue owing income taxes after your Chapter 7 case is completed you may be pleasantly surprised how reasonable the tax authorities can be with their repayment terms. You will need to continue paying interest, and usually also a penalty—both of which would likely be avoided through Chapter 13.  But the interest rate right now—with the IRS at least—is quite low, and some penalties reach a cap and stop accruing after that. You do need to keep in mind that the taxing authorities may or may not be flexible about lowering the payments if your finances take a turn for the worse. So you should avoid entering into a tax installment payment agreement unless you have reliable income source.

A Chapter 7 “Straight Bankruptcy” Can . . . Help You Walk Away from Your Business

Posted by Kevin on October 1, 2014 under Bankruptcy Blog | Comments are off for this article

There are pros and cons to the above statement.  That is why we say “Can Help” as opposed to “Will Help”

What happens when a small business goes under.  It usually means that not enough money is coming in to pay bills and employees (much less the owner).  This can lead to collection efforts from vendors which go from holding back product to suing the business entity and perhaps even the owner for money.  Multiple, disgruntled vendors lead to multiple, usually unwinnable lawsuits. Ultimately, you realize that you cannot stay open any longer.

Shutting down a business can be very time consuming and emotionally draining, especially when the vendors are suing the company and you.  You have to deal with vendors and suppliers, advertisers, workers, customers, etc.  You may have physical plant  which will be subject to foreclosure or tenancy action.  You may have product that needs to be liquidated.  You may need to go after accounts receivable.  That is a lot of work, and your inclination is to put everything behind you and move on.

If your business is incorporated or an LLC, it cannot receive a discharge under Chapter 7.  For that reason, many of my colleagues at NACBA believe that you should not put a small corporation (sometimes called a close corporation) or an LLC in bankruptcy.  However, if the corporation is being sued by multiple creditors and needs to be liquidated in an orderly fashion, a Chapter 7 may be helpful.  The automatic stay will stop the lawsuits.  The trustee will be responsible for the liquidation.  This can free up the owner to move on to new pursuits. (In NJ, this process can be accomplished also but means of a State court Assignment for the Benefit  of Creditors.)

On the other hand, if the corporation or LLC  is service oriented as with few assets, bankruptcy may be an unnecessary expense.

Under either scenario, a possible issue can be what to do if the principal of the corporation or LLC finds himself as a defendant in multiple lawsuits.  If the principal guaranteed the obligation, then he is SOL.  Even if principal did not guarantee, a favorite tactic of NJ collection attorneys is to sue the entity and sue the principal under theory of piercing the corporate veil.  This is usually a bogus lawsuit but requires that you interpose an answer and move for summary judgment.  This can be a major expense especially if you get sued by 10-12 aggressive creditors and may lead to consideration of filing a individual 7.  This decision, however, would have to be made on a case by case basis.

If the business entity is a sole proprietorship (d/b/a), then the debtor is really the owner.  d/b/a’s can fail for  the same reasons that close corporations or LLC’s fail.  But, in this case, it is the owner of the business that is on the hook so the owner files the Chapter 7.  Filing a Chapter 7 will stop most collection actions because of the automatic stay, and the owner/debtor can receive a discharge.  Of course, the bankruptcy will include both the business assets and the personal assets.  Most, if not all, of the business assets will probably be sold and the proceeds will be used to pay the trustee and the creditors.  The debtor is able to utilize his or her exemptions to save many of his or her personal assets such as the house, car, household furniture and furnishings, clothing and other things.

If you are running a small business that is failing, you need to speak with your accountant first, and then an experienced bankruptcy attorney.

In the next few blogs we will discuss this issue: after closing down a business and filing bankruptcy, when would Chapter 7 be adequate vs. when the extra power of Chapter 13 would be needed, in dealing with particular debt and asset issues. We’ll start the next blog on dealing with taxes.

Paying Your 2013 Income Taxes on the Backs of Your Other Creditors

Posted by Kevin on April 16, 2014 under Bankruptcy Blog | Comments are off for this article

An income tax debt that you owe for the 2013 tax year presents both some challenges and opportunities if you file bankruptcy in early 2013. The challenges are practical ones. You have a debt that you wish you didn’t have, it can’t be written off (discharged) in bankruptcy, and you may well not know how much it is because you haven’t prepared the tax return yet. So it can be a frustrating and scary uncertainty.

The interplay between taxes and bankruptcy can be complicated, however, under the right circumstances your 2013 income tax debt can be—believe it or not–paid in full essentially without costing you anything. That’s because under bankruptcy law in many circumstances recent tax debts are paid in place of your other creditors, leaving less or nothing for those other creditors. This can happen in both Chapter 7 and Chapter 13, much more likely under that latter. This blog shows how your taxes can be paid in an “asset” Chapter 7 case, and the next blog shows the more common Chapter 13 situation.

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Payment of 2013 Income Taxes in an “Asset” Chapter 7 Case

Most Chapter 7 cases are “no asset” ones. This means that the bankruptcy trustee takes nothing from you because everything you have is exempt or else not worth the trustee’s effort to collect. So none of your creditors—including the IRS—are paid anything through your Chapter 7 case itself.  In that situation, you would have to make arrangements to pay any 2013 income tax with the IRS (and/or any state tax agency, if applicable).

On the other hand, an “asset” Chapter 7 case is one in which you own something that is NOT exempt and IS worth for the trustee to collect, sell, and distribute its proceeds to the creditors.

The Example

Consider this. You own a boat that has become more expensive and more work to own than you’d expected.  In a Chapter 7 case, if you do not claim an exemption on the boat and your bankruptcy trustee believes the boat is worth collecting from you and selling, then the 2013 taxes are among the first debts that the trustee will pay out of the proceeds.   Why?  Because the taxes are what is called “priority debts”.  Although most of your creditors are paid pro rata—equally, based solely on the relative amount of their debts— “priority debts” are paid ahead of your other creditors. So, assuming you do not have any debts that are even higher on the priority list (see Section 507 of the Bankruptcy Code), your 2013 IRS/state income tax will be paid in full before the trustee pays anything to any of your other creditors. As a result you would no longer have this tax to pay after your Chapter 7 case is completed.

Caution

For this to work as described takes just the right conditions, with more twists and turns than can be fully explained here. So definitely discuss all this thoroughly with your bankruptcy attorney.

Chapter 13 Bankruptcy Helps You with Special Debts When Chapter 7 Can’t

Posted by Kevin on April 11, 2014 under Bankruptcy Blog | Be the First to Comment

Chapter 7 sometimes doesn’t help you enough with certain debts. Included are some income taxes, child and spouse support you’re behind on, home mortgage arrearage, and vehicle loans, among others.

There are times when filing a straight Chapter 7 case will help you enough by writing off your other debts so that you have the practical means to take care of the remaining special debt(s). It frees up money.   But other times you need the extra protection that a Chapter 13 payment plan gives you.

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Here are the ways Chapter 7 could help with the first three of the special kinds of debts mentioned above, and ways that Chapter 13 can help more if necessary. The fourth kind—vehicle loans—are in some respects more complicated, so they’ll be addressed separately in an upcoming blog.

Income Taxes

Some income taxes can be discharged (written off) in bankruptcy, including under Chapter 7, but some can’t, generally more recent ones. If you have a tax debt that will not be discharged, but is the only debt that will not be and is small enough, you can file a Chapter 7 case and make payment arrangements directly with the IRS (or applicable state tax agency). If the monthly payment amount is manageable, this could well be the sensible way to go.

But if the tax amount is too large for what you can afford to pay, or you have a number of debts that would not be discharged under Chapter 7, then Chapter 13 would help in the following ways:

  • You would likely get more time to pay off the tax.
  • The IRS or state agency would be prevented from taking collection action without permission of the bankruptcy court.
  • Generally you would not need to pay interest and penalties from the time your case is filed, allowing you to pay off the tax debt with less money.

Child and Spousal Support Arrearage

State laws allow ex-spouses and support enforcement agencies to be extremely aggressive in their collection methods.  Sometimes you can work out a deal with these enforcement agencies, sometimes not.  If you can make a deal, then Chapter 7 may make sense for you.

But otherwise you need the extraordinary power of Chapter 13. It gives you three to five years to pay the support current, as long as you rigorously keep up with your ongoing monthly payments in the meantime. And throughout this time all of the very tough collection tools usually available to your ex-spouse or support agency are put on hold for your benefit.

Home Mortgage Arrearage

If you are behind on your home mortgage but want to keep the home, and you file a Chapter 7 case, you are at the mercy of your mortgage company about how much time you will have to catch up on the mortgage.

In contrast, similarly to what is stated above, Chapter 13 will give you three to five years to cure that arrearage. So, if you are too far behind to be able to catch up within the time you would be given under Chapter 7, then you need to file under Chapter 13.