Posted by Kevin on September 28, 2013 under Bankruptcy Blog | 
If you were already on the financial edge and just found out you owe a bunch of income taxes, here is how bankruptcy can help.
If you owed nobody but the IRS for last year’s income taxes, you wouldn’t likely need to think about filing any kind of bankruptcy. In many circumstances, the IRS is actually reasonably decent to work with, such as in setting up a monthly payment plan for catching up on a single year’s tax shortfall. Sure, you’ll pay some penalties and interest, but if you can pay it all off in reasonable monthly payments in the next year or so, that wouldn’t be such a bad thing.
But if you owe for more than one year, or are just filing for the 2012 tax year on extension, and still owe for 2013, then it looks like you’re getting into a vicious cycle. And if on top of that, you have a whole bunch of other debts, you owe it to yourself to check out Chapter 7 and Chapter 13 as possible ways out of that vicious cycle. Today we’ll briefly explore how Chapter 7 helps, and then how Chapter 13 does in the next blog.
Chapter 7 and Income Taxes
You may well have other reasons for choosing to file a Chapter 7 instead of a Chapter 13, but the rule of thumb as far as taxes is pretty simple, especially if the only taxes you owe are from the last year or two:
File a Chapter 7 case if after doing so you will be able to get caught up on your back and current taxes through manageable monthly payments made over a reasonable period of time. In other words, file a Chapter 7 if you don’t need the extra protection and benefits provided by Chapter 13.
Both Chapter 7 and 13 can legally write off (“discharge”) income taxes, but can never do so until at least three years from the time the tax returns for those years were due to be filed (including extensions, if any). So as of now you could discharge 2008 income taxes, and 2009 taxes that were filed on April 15. but not later ones. That’s because 2008 taxes were due either April 15, 2009 or October 15, 2009 depending on whether you got an extension, and you could discharge a 2008 tax debt starting three years later, after April 15, 2012 or after October 15, 2012. You could discharge the 2009 tax debt if you filed on April 15, 2010. If you filed your tax return on October 15, 2010, you could not discharge the tax obligation if you filed Chapter 7 today (but you may be able to discharge if you held off your bankrutpcy filing to after October 15, 2013). You’d have to meet some additional conditions as well, but this three-year condition is a good starting point.
So unless you currently owe income taxes going back further than 2009, Chapter 7 is not going to discharge any of them. That does not mean that Chapter 7 is without benefit, though. The benefit it will give you is discharging all or most of your other debts. So the analysis we will go through with you when you meet with us involves two questions:
1) How much will filing Chapter 7 improve your monthly cash flow? In other words, how much will you be able to pay to the IRS realistically on a monthly basis, both to catch up on the back taxes and to make any necessary adjustments to the current withholdings or estimated quarterly payments?
2) How much do you owe in back taxes? Will the amount that you can realistically afford to pay each month enable you to get current in a reasonable time (so you’re doing so within the length of time the IRS will allow, and without incurring a crippling amount in additional penalties and interest)?
Unless we confidently believe that Chapter 7 will solve your tax problem, we’ll look at whether Chapter 13 would do better. It’s wise to consider Chapter 13 regardless, so you’ll know the advantages and disadvantages of both options. See the next blog for that.
Posted by Kevin on September 22, 2013 under Bankruptcy Blog |
If you need bankruptcy protection but already filed a bankruptcy case within the last few years, you may still be able to file a new one now.
There are some strict rules about when you can file a bankruptcy case after having filed a previous one. But as with so many other areas of law, there are opportunities when we look more closely.
Previous Bankruptcy Filing vs. Discharge
It’s not necessarily previously FILED bankruptcy cases that count, but only ones in which you received a DISCHARGE of your debts. All the timing rules in the Bankruptcy Code dealing with when you can file a new case refer to the length of time since “the debtor has been granted a discharge” or “has received a discharge” in the previous bankruptcy case.
In other words, if your previous case was not successfully completed—it was dismissed before you finished it—that case would not prevent you from filing a case now, no matter how long or short of a time since that previous case was filed.
So make sure—absolutely sure—that you got a discharge in your earlier bankruptcy case. If you distinctly remember that your case finished the way it was supposed to, you very likely DID get a discharge. But you definitely want to make sure. Find out from your former attorney. Or dig up the discharge order issued by the Bankruptcy Court from your old paperwork, or we can likely find out for you when you come in for your initial consultation.
The Timing Rules
If you’ve heard that you have to wait 8 years between bankruptcy filings, be aware that only applies to one of a number of possible scenarios: the length of time from the previous discharged Chapter 7 case to the filing of a new Chapter 7 case.
If your previous case was a Chapter 7 one and you now want to file a Chapter 13 case, the applicable length of time is only 4 years.
If your previous case was a Chapter 13 one and you now want to file a Chapter 7 case, the length of time is only 6 years. And in fact if that previous Chapter 13 case was one in which your unsecured creditors were paid at least 70% of their debts, then there is NO limitation on filing a Chapter 7 case afterwards.
And if your previous case was a Chapter 13 one and you now want to file a Chapter 13 case, the applicable length of time is only 2 years.
And very important: on all of these the clock starts running NOT at the time of discharge—generally at the end of a case—but rather earlier, at the date of filing at the very beginning of the prior case. So what count is the date of filing of the prior case to the date of filing the new case. For example, if your previous case was a Chapter 13 one that was filed on October 1, 2006, and it took five years to complete so that the discharge was entered on October 1, 2011, you would be able to file a Chapter 7 case starting October 1, 2012.
Why File a Bankruptcy Case If You Can’t Get a Discharge?
So if you need bankruptcy protection but not enough time has passed, you can still file the case but you just won’t receive a discharge of your debts. Why would you ever want to do that?
Probably never for a Chapter 7 case, since almost always the main benefit of a Chapter 7 case is the discharge of your debts.
But Chapter 13 provides a number of other benefits distinct from the discharge of debts. For example, it stops a foreclosure and gives you years to catch up on your mortgage arrears. It also stops extremely aggressive collection of unpaid support payments, including the suspension of professional/occupational/driver’s licenses, again giving you years to bring it current. It may be able to significantly reduce what you pay for your vehicle through a “cram down.” For these and other reasons it can make a lot of sense to file a Chapter 13 case while knowing that you’ll not get a discharge of any of your debts. You may not even have any debts to discharge, but just need one or more of those other powerful benefits.
In fact that’s usually the situation with the so-called “Chapter 20.” This usually involves, first, the filing of a Chapter 7 case, which results in the discharge of most of the debtor’s debts. Then, second, immediately after that’s done, a Chapter 13 is filed to use one or more of its benefits. (Chapter 7 + 13 = 20.) Since most of the debts were discharged in the prior Chapter 7, the debtor doesn’t need a discharge in the Chapter 13 case.
This blog should make it clear that a simple rule—8 years from one bankruptcy to the next one—is often woefully incomplete and misleading. In addition, there are complicated rules concerning whether the automatic stay will apply in case involving multiple filings. This is another good argument that you truly need to talk with an attorney who focuses on bankruptcy instead of making misassumptions that could cause you lots of unnecessary grief.
Posted by Kevin on under Bankruptcy Blog |
If you and someone else jointly owe a debt, bankruptcy can protect you against the debt and against your co-signer. Or if you want, bankruptcy can instead protect your co-signer.
Let’s look at two essentially opposite scenarios involving you and your co-signer getting sued on a debt you both owe:
1) You’ve had a falling out with the co-signer, and all you care about is escaping the debt; or
2) You believe you have a moral duty to protect the co-signer, so that is your highest priority.
We’re going to address the first scenario today, and then the second one in the next blog.
Protecting Yourself…
If you and your co-signer are being pursued by your creditor, and you cannot and will not pay the debt, you have two distinct obligations to worry about—a definite one to the creditor and a likely one to the co-signer.
… from the Creditor Itself
The obligation to the creditor is based on your promise to pay the debt. Most likely that obligation can be discharged (legally written off) by filing bankruptcy.
Like any other creditor, this one could object to the discharge on grounds of your fraud or misrepresentation, but those objections are rare.
You could discharge this debt through either Chapter 7 or Chapter 13, depending on whichever is in your best interest otherwise. Chapter 13 happens to come with the “co-debtor stay,” some extra protection for your co-signer which will be discussed in the next blog, because here we are assuming you don’t care about protecting the co-signer.
… from the Co-Signer
You very likely have a closely related but still distinct obligation to your co-signer, one that is likely less clear than the one you owe directly to the creditor. This obligation to the co-signer is indirect, likely only to arise if your co-signer pays all or part of your debt to the creditor. Even then you may or may not have a legal obligation to the co-signer. There is a good chance that you and the co-signer did not write out the terms of your obligation. So your obligation to the co-signer could be merely inferred, based on an unspoken assumption that you would make the co-signer whole if you ever failed to pay the debt and the co-signer paid the creditor all or part of it. But there could also be a sensible inference—depending on the facts of the case—that the co-signer did not expect you to pay it in that situation. So you could possibly defend against that liability.
But practically speaking, the creditor is going to pursue both you and your co-signer. If you can’t pay the creditor who you clearly owe, there may well not be much point in putting a lot of time and expense into defending against a legal obligation to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.
If you do file bankruptcy, be sure to list among your creditors not just the direct creditor but also your co-signer. Otherwise you could remain liable to the co-signer after your bankruptcy case is finished.
As with your direct creditor, your co-signer could object to the discharge of his or her claim against you, based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. Although these objections are rare, they ARE more often raised by former friends, ex-spouses, ex-business partners. Why? Because 1) they have a personal axe to grind, 2) misunderstanding tend to arise more in informal arrangements, and 3) these kind of folks may know more damaging information about you than would a conventional creditor.
The best way to protect yourself from such challenges is to explain the situation thoroughly to your attorney when you first meet. That way your bankruptcy documents can be prepared in a proactive way, and you’ll avoid being blindsided.
Posted by Kevin on September 12, 2013 under Bankruptcy Blog |
If you owe income taxes, and are at the point that the IRS is about to seize your assets, you need to consider bankruptcy. It can help in surprising ways.
Here are FIFTEEN ways that filing either a straight Chapter 7 bankruptcy or a Chapter 13 payment plan could relieve a major income tax headache. And even this long list is only a partial one!
1. Both Chapter 7 and 13 stop the IRS’ collection activities against you, including levies on your paycheck, bank account, and vehicles, and tax liens on your home and other real estate.
2. Both Chapter 7 and 13 can completely discharge (legally write off) some income taxes.
3. A Chapter 7 case would likely discharge all or most of your non-tax debts, more likely giving you the financial means to enter into a manageable installment payment plan afterwards with the IRS, to pay off whichever taxes not discharged in that bankruptcy case.
4. If you have an “asset” Chapter 7 case—the relatively unusual kind in which the bankruptcy trustee claims one or more of your assets to sell and distribute to creditors—non-dischargeable tax debts will generally be paid in that distribution ahead of other dischargeable debts, either paying off or at least paying down those tax debts.
5. Even if you cannot discharge a tax debt right now, you will likely be able to do so at some point in the future. There are strategies for buying time until that point.
6. Chapter 13 allows you to pay off non-dischargeable income taxes through payments based not on the IRS’ demands but rather on your own realistic budget.
7. If you have other conventional debt—credit cards, medical bills and such—along with back income taxes that can’t be discharged, Chapter 13 generally allows you to favor the tax debt ahead of these other creditors. So you would be allowed to pay the taxes in full before anything would trickle down to the conventional debts.
8. Once the Chapter 13 case is filed, that generally stops any further interest and penalties from being added to the nondischargeable tax debts, which reduces the amount that you need to pay.
9. During the time that payments are being distributed to creditors through the Chapter 13 case, the IRS has to wait its turn in line, often waiting behind debts that are even more important to you, such as back payments on your home mortgage, your child or spousal support arrearage, or even vehicle and furniture payments.
10. Even if you only have tax debts that would otherwise be discharged in Chapter 7, but you need to file Chapter 13 to deal with other debts that are important to you—such as on your home and vehicle and support arrearage—these other obligations can legitimately reduce how much you pay on your tax debts. Sometimes you pay nothing on the taxes. So Chapter 13 can be the best of all worlds: protection from all your creditors including the IRS while you take care of other debts, along with paying little or nothing on your tax debts.
11. If you have multiple years of income tax debts—some of which are dischargeable and some not—in most Chapter 13 cases your plan can arrange to pay the taxes that would not be discharged in full before paying a dime to the rest of the taxes. You may even avoid paying anything on those dischargeable taxes before they are discharged forever at the completion of your case.
12. Throughout all this time during a Chapter 13 case—three to five years—the IRS cannot take any collection action against you or any of your assets, unless it gets specific court permission, which would usually only happen if you failed to comply with your own plan commitments.
13. Even if the IRS recorded a tax lien against your home before your Chapter 13 case was filed, the IRS would be prevented from executing on that lien until you had the opportunity to pay off the debt behind that lien, and get a release of that lien.
14. If you are behind in estimated or withheld income taxes during the current tax year, you can file a partial-year tax return, and pay the taxes for that partial tax year through your Chapter 13 plan—with no additional interest and penalties. Then you can put together your budget from that point forward with appropriate estimated tax payments or withholdings so you have no tax owing from that remaining part of the tax year.
15. When your Chapter 13 case is successfully completed you can be tax-free and debt-free.
Posted by Kevin on September 11, 2013 under Bankruptcy Blog |
If you’re behind on child or spousal support, the support enforcement agency can be extremely aggressive. Chapter 7 doesn’t help much. Chapter 13 CAN.
In most states an ex-spouse—or the state’s support enforcement agency acting on his or her behalf—has extraordinary ways to collect on current and back support obligations. These include not just ways of getting directly at your money, but also ways to hurt you with the intent of forcing you to pay.
So we’re not just talking about garnishing your wages and bank accounts, taking away income tax refunds, or putting liens on your real estate. We’re talking coercive action. Your driver’s license can be suspended. This includes your commercial driver’s license, so that you can’t work if you’re a truck driver or have any other job requiring that license. Your professional or occupational license could also be suspended, preventing you from legally working in your profession or business as a nurse, doctor, realtor, insurance agent, mortgage broker, lawyer, or even in some places athletic trainer or funeral director!
There’s more. Your hunting, fishing, boating and other recreational licenses could be revoked. You can even be denied a U.S. passport.
Chapter 7 Gives Very Limited Help
“Straight bankruptcy” under Chapter 7 unfortunately does not stop any of these collection methods. The “automatic stay” that stops just about all other collection efforts has an exception for child and spousal support. (See Section 362(b)(2)(B) of the Bankruptcy Code.) The only way that Chapter 7 can help is that it can often legally write off (“discharge”) all or most of your other debt so that you would have the money to pay your support. But that does not help deal with your financial emergency if you’re in the support enforcement’s crosshairs.
Chapter 13 CAN Help Where it Counts the Most
The filing of a Chapter 13—the three-to-five-year “adjustment of debts” kind of bankruptcy—DOES stop all these aggressive ways of collecting on support obligations. The “automatic stay” does apply in most respects to Chapter 13, as long as it affects the collection of your assets that did not exist at the time your case is filed, such as future income. But to make this protection last more than just a few days or weeks, you must rigorously meet a number of conditions:
- Your Chapter 13 plan must show that you are going to catch up on all the back support during the life of the plan. And then you must make your monthly plan payments on time to show that your plan is feasible and that the back support will in fact be paid in full.
- Your budget must show that you will be able to start (or continue) making the regular monthly divorce court ordered support payments, AND then you must actually pay those on time. And that starts with the first one that is legally due on whichever day it’s due immediately after your Chapter 13 is filed, and then every month thereafter.
- At the end of your Chapter 13 case you must certify that you are current on your ongoing support payments, or else you cannot complete your case and get a discharge of your remaining debts.
On the positive side, Chapter 13 neutralizes most of the extremely dangerous firepower of your ex-spouse or the support enforcement agency, and gives you the opportunity to solve an otherwise very difficult problem. Chapter 13 is often a great tool for catching up on your back support, because you are allowed to favor that debt over just about every other one. You could end up paying very little if anything else to your other creditors, except those other ones that matter to you, such as your mortgage, vehicle loan, taxes and such.
But you must be financially able to meet the above conditions, and then strictly abide by them. If during the Chapter 13 case you miss one of your regular monthly support payments, or one of your plan payments, you can expect your ex-spouse or support enforcement to ask the bankruptcy judge for “relief from the automatic stay,” that is, for permission to resume or even intensify their earlier collection efforts. At that point the judges will tend not to be very sympathetic to you, since you are not complying with the conditions that you had agreed to at the beginning of your case.
