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 2

Posted by Kevin on November 7, 2018 under Bankruptcy Blog | Be the First to Comment

In the previous blog, we talked about debts in general, and secured debts in particular.  Today, we will talk about general unsecured debts and priority debts.

General Unsecured Debts

All debts that are not legally secured by collateral are called unsecured debts.  And “general” unsecured debts are simply those which are not one of special “priority” debts that the law has selected for special treatment. (See below.) So the category of “general unsecured debts” includes all debts with are both not secured and not “priority.”

General unsecured debts include every imaginable type of debt or claim. The most common ones include most credit cards, virtually all medical bills, personal loans without collateral, checking accounts with a negative balance, unpaid checks, payday loans without collateral, the amount left owing after a vehicle is repossessed and sold, and uninsured or under insured vehicle accident claims against you.

It helps to know that sometimes a debt which had been secured can turn into a general unsecured one. For example, a second mortgage that was fully secured by the value of the home at the time of the loan can become unsecured in a Chapter 13 bankruptcy if the home’s value falls significantly.  Or what was originally a general unsecured debt may, in certain circumstances, turn into a secured debt.

Priority Debts

As the word implies, “priority” debts are ones that Congress has decided should be treated better than general unsecured debts.

Also, there’s a strict order of priority among the priority debts. Certain “priority” debts get paid ahead of the others (and ahead of all the general unsecured debts). In bankruptcy getting paid first often means getting paid something instead of nothing at all.

This has the following practical consequences in the two main kind of consumer bankruptcy:

In most Chapter 7 cases there is no “liquidation” of your assets for distribution to your creditors. That’s because in the vast majority of cases, all the debtors’ assets are protected; they are “exempt.” But in those cases where there ARE non-exempt assets which the bankruptcy trustee gathers and sells, priority debts are paid in full by the trustee before the general unsecured ones receive anything. And among the priority debts those of higher priority are paid in full before the lower priority ones receive anything.

In a Chapter 13 case, your proposed payment plan must demonstrate how you will pay all priority debts in full within the 3 to 5 years of your case. Then after the bankruptcy judge approves your plan, you must in fact pay them before you can be discharged

Here are the most common priority debts for consumers are:

• child and spousal support—the full amount owed as of the filing of the bankruptcy case
• certain income taxes, and some other kinds of taxes.