Posted by on May 30, 2015 under Bankruptcy Blog | 
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.
Posted by on May 24, 2015 under Bankruptcy Blog |
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.
Posted by Kevin on May 12, 2015 under Bankruptcy Blog |
Just when you think, as a debtor’s attorney, you have Chapter 7 and Chapter 7 trustees figured out, the system and creative trustees throw you a curve ball.
A majority of my middle class to upper middle class debtors file because at least one spouse lost a high paying job. Unfortunately, just because you lost your job does not excuse you from paying your financial obligations. One of those obligations, at least in the mind of most husband and wife debtors, is the college tuition that they paid on behalf of their children. When I ask my clients to put together a budget, many still list the college tuition payment that they could afford a year or two ago but not now. Of course, that leaves nothing for creditors, but, as my clients protest, they have an obligation to their children.
I have had many a discussion with parents who think they belong in Chapter 7 because they are budgeting $1000 or more per month for tuition, when the reality is that the trustee will never allow such a payment, and will probably force that debtor into a Chapter 13. What the debtor /parent cannot understand is that in the eyes of the bankruptcy trustee, the obligation to pay college tuition belongs to the son or daughter and not the parent. While the parent looks at their child as a child, the trustee looks at them as a full grown adult because they are 18- capable of paying their own way.
Well, for those parents/debtors, some trustees around the country are adding insult to injury. Not only are they prohibiting college tuition as an expense on the means test or Schedule J, they are threatening colleges and universities with actions to claw back tuition paid up to four years before the filing on the grounds that it is a fraudulent conveyance. Now, we usually think of a fraudulent conveyance in terms of the debtor tries to screw his creditors by conveying his second home to his brother prior to filing.
As I stated above, many parents believe that it is their obligation to pay their children’s tuition. But, trustees have been pointing out that it is the student, and not the parents, who gets the benefit of college. The quid pro quo for that benefit is payment of tuition. Therefore, tuition is the obligation of the student and not the parent. By paying the child’s tuition, the argument goes, it is just the same as deeding your home to a relative- your creditors do not get the benefit of that payment, and you, the debtor, are paying the obligation owed by a third party.
So, trustees are going after the colleges who, in more cases than not, are making deals and paying back some or all of the tuition to the trustee. The colleges, in turn, are trying to squeeze the student to recoup the money. Part of the squeeze on the student is to withhold diplomas or transcripts. Of course, if the student is out of school for a few years, that type of leverage cannot work.
We are talking tuition here and not student loans. Parents can be on the hook for Plus loans. Most student loans are not dischargeable in bankruptcy.
The Wall Street Journal had a big article on this topic last week. I have seen other articles on this issue over the last 6 months. So do not be surprised if this issue comes up more and more in consumer bankruptcies.
