Posted by Kevin on December 23, 2014 under Bankruptcy Blog | 
Protect your business assets immediately with the “automatic stay” and permanently with property exemptions.
Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues.
BUT, even if your business DOES have some assets, as long as that business is a sole proprietorship, filing a personal Chapter 7 case often provides you a sensible way for dealing with those remaining business assets. You may be able to keep those assets if you need them, or if not, you can let your Chapter 7 trustee sell them and pay some of your most important creditors.
Business Assets Protected by the “Automatic Stay”
You may want to keep business assets which you need to use to generate income after your bankruptcy—either as an employee or through self-employment.
As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such.
As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral.
Business Assets Protected by Property “Exemptions”
Instead, the trustee will be interested in your “free and clear” business assets. However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”
A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code. NJ allows a debtor to choose; however, it is not much of a choice. Why? Because the state exemptions are so puny that about 99.9% of debtors use the federal exemptions. Under the federal exemptions, you get to keep a little over $2,000 of business tools. Under NJ, it would come under the general exemption of $1000. Clearly, in either case, the exemption is far from generous. However, if the assets are older but usable to you, you can make an offer to the trustee. Most trustee will entertain even a lowball offer rather than go through an auction, especially on used items of questionable value.
Posted by Kevin on December 13, 2014 under Bankruptcy Blog |
Careful: if your business is not a sole proprietorship, legal disputes against your business are not “stayed” by your personal bankruptcy’s “automatic stay.”
This series of blogs has been about the benefits of filing a bankruptcy case when closing down your business. Through the power of the “automatic stay”— any ongoing lawsuit against you or your property must stop. But there are some important exceptions to this, situations in which the automatic stay would not apply
Bankruptcy and its automatic stay protect the “person” filing bankruptcy and his, her, or its assets. Other “persons” are generally NOT protected. The issue is whether you and your business are considered to be the same or separate “persons” for this purpose.
If your business is a sole proprietorship, the law considers you and your business to be the same “person.” So a lawsuit against the business would be stopped by your personal bankruptcy filing. But what if your business was set up as a corporation, a limited liability company (LLC), or a partnership, and you are dealing with a lawsuit against both you and the business?
Disputes Against Your Corporation, LLC, or Partnership
- If your business was set up as a corporation or LLC and it is still operating when you file a personal bankruptcy, that filing does not “stay” any litigation against the corporation because it is a separate legal entity, a separate “person.” To the extent the dispute and/or lawsuit is against you personally, that portion would be stayed. But this may not help much if the lawsuit continues to disrupt and threaten your business.
- Even if your business in the form of a corporation or LLC is no longer operating, but itself still owns some assets, those assets are not protected by your personal bankruptcy filing. This includes assets that the business might own outright—such as receivables that it was waiting to receive, or business assets that are the collateral on business loans—such as vehicles or equipment.
- If your business is or was a formal or informal partnership, the partnership’s creditors or adversaries would very likely be able to continue pursuing the partnership and its assets, as well as pursuing your partner and his or her assets, regardless of your personal bankruptcy filing. That’s because partners are generally jointly liable for the obligations of a partnership, and your partner and the partnership itself are both “persons” separate from you. So you have the same problem just outlined above as to partnership assets.
That leads to the main lesson here. If your business legally qualifies as a separate “person,” and has assets that need to be protected, it may need to file its own separate bankruptcy. Since we are focusing on closing down your business in this series of blogs, the filing would be under Chapter 7.
You should really consult with a bankruptcy lawyer on these issues.
Posted by on December 2, 2014 under Bankruptcy Blog |
Don’t assume that just because your income taxes are too new to be written off that 1) bankruptcy can’t help, or 2) only Chapter 13 can help.
Even if none of your taxes can be discharged (written-off), or most of them can’t be, a Chapter 7 bankruptcy may STILL set you up so you can deal with those taxes in a constructive way. You may not need the extra expense and time of going through a three-to-five-year Chapter 13 case.
Clean Your Slate of Other Debts So You Can Pay Your Taxes
So the simple-to-ask, maybe not-so-simple-to-answer question is whether a straight Chapter 7 bankruptcy will help you enough? More precisely, if you filed a Chapter 7 case, after it was done would you reliably be able to make large enough monthly payments to the IRS (or New Jersey) on whatever tax debt(s) that your bankruptcy would not discharge so that those taxes would be paid off safely and in a reasonable time?
“Safely” refers to the fact that you would no longer have protection from your creditors—including your tax creditor(s)—after the three months or so your Chapter 7 will usually take to complete. So after that you’d be on your own dealing with the IRS/NJ. That’s OK if you are confident that you would be able to make consistent monthly installment payments at the required amount—not just right after your bankruptcy is completed but throughout the time until it is paid off. A Chapter 7 is a good idea if you don’t need one of the most important benefits of a Chapter 13 plan as to your tax debts—the continuous protection from creditors that you get throughout the payment process. That’s especially valuable if your circumstances change and you need to lower your payments. At that point you’d probably not want to rely on the flexibility of the IRS or NJ (which can often be more rigid than the IRS).
“Reasonable time” refers to the fact that the IRS and state agencies, in almost all circumstances, will continue adding interest and penalties throughout the time you are making installment payments. Even if they are relatively flexible about stretching out the payments, you need to look at how much the ongoing interest and penalties will add to the amount you must pay before you’re done. In a Chapter 13 case, usually no more interest and penalties get tacked on once the case is filed, which can save a lot of money if you owe a fair amount of non-discharged taxes.
So how do you know whether you will be able to make tax installment payments safely enough and large enough to pay off the tax debt(s) in a reasonable time?
First, it means calculating how much a Chapter 7 case would help your monthly cash flow and your longer term financial stability by discharging your other debts.
Second, you need to know what the IRS and/or state tax authority will likely accept as monthly payments, given the amount of your remaining tax debt and other financial information. From there the amount of additional interest and penalties can roughly be calculated.
Your bankruptcy attorney will help you with these projections and calculations. He or she will then advise you about whether you are a good candidate for cleaning your slate with Chapter 7 and then paying your remaining tax debt directly.
Posted by Kevin on November 29, 2014 under Bankruptcy Blog |
Ongoing litigation, or the threat of it, against you and/or your business, usually dies with your bankruptcy filing.
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A Chapter 7 case can help by:
- immediately stopping most litigation against you and/or your business, at least temporarily;
- permanently stopping most litigation by legally discharging the disputed claim; and
- providing strong disincentives for your adversary to keep pursuing you after your bankruptcy filing.
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This series of blogs is about the benefits of filing a bankruptcy case when closing down your business. The reality is that businesses are often closed as a consequence of litigation, or the threat of litigation, against the business or business owner. These disputes can take every possible form—by way of example, simple collection actions by creditors, contractual disputes with customers, enforcement action by governmental regulators, and fights with other business owners or investors. A bankruptcy often becomes necessary when either the opposing party wins a judgment against the business and/or the owner, or the business runs out of money to pay the attorney fees and other costs of litigation. The business is often already on the ropes, and the judgment, or just the financial and emotional costs of the lawsuit, or sometimes even just the threat of one is enough to persuade the business owner to throw in the towel and close down the business.
The question is: what will happen to the dispute and/or litigation against you and/or the business?
Litigation Immediately Stopped by the “Automatic Stay”
The automatic stay legally stops creditors from taking any new collection action against you, and from continuing any action, including litigation. It is imposed simultaneously with the filing of your bankruptcy, without a judge needing to sign an order. The automatic stay requires your adversary to at least take a pause in his efforts against you, and often persuades him to do nothing further against you.
Why Most Disputes Will End at Your Bankruptcy Filing
This immediate stopping of collection and litigation usually ends up being permanent, for a number of reasons.
Your adversary is usually trying to get you or the business to pay something, and that alleged obligation is discharged—legally written off permanently—in your Chapter 7 case.
Bankruptcy law does allow any of your creditors (including those with alleged claims of any kind) to try to object to the discharge of their debts or claims. But these objections are relatively rare, for two reasons:
1. They are difficult for a creditor to win. The legal grounds for objections are relatively narrow. Debts are assumed discharged unless the creditor can prove to the bankruptcy court that those narrow grounds are met. Instead of just proving the existence of a valid debt or claim, as in a conventional lawsuit, the creditor has to provide convincing evidence that you engaged in certain specific bad behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to a person or property.
2. The creditor is faced with practical indications that it is wasting its time and money to pursue you further. In filing bankruptcy, you present to the court a rather detailed set of specific information about your finances. You are able to be questioned by the creditors about those documents and about anything else relevant to the discharge of the debts. When these reveal that you genuinely have nothing worth chasing—which is almost always the case—most creditors accept that pursuing you further will do them no good.
The Exceptions: Disputes Not Be Stopped by Your Bankruptcy Filing
There are two sets of exceptions: 1) when you are not protected by the automatic stay; and 2) when a creditor challenges the discharge of its debt or claim. These will be addressed in the next two blogs.
Posted by Kevin on November 28, 2014 under Bankruptcy Blog |
You were downsized or your company went out of business, or your department was outsourced to India. You lost your job and collected for as long as you could. But what you collected in unemployment was not enough to pay all your bills, so you got sued, and some creditors got judgments against you.
While you were unemployed, it really did not make a difference that a few doctors, AMEX and Discover got judgments against you. They could not levy on your unemployment benefits. But, now the economy has gotten better and you just got an offer in your field at about 90% of what you were earning when things went sideways.
Now is the time for you to start thinking about how you are going to deal with those judgments (and other debts that have not been reduced to judgment). With money in your pocket and a few new credit cards, your activity on the credit reporting agencies will increase. Creditors will put 2 + 2 together and figure you have a job. Then, the garnishments will start coming in. Great way to impress a new employer.
Bankruptcy may be the answer. Debt consolidation through a reputable credit counseling company may also keep the wolves away. You owe it to yourself and family to look into these options. Be pro-active.
Final word to the wise. It is holiday season. People are beating each other up at Macy’s all over the US today. Maybe you are thinking that you can have one last fling and then take care of business after the New Year (if any of your credit cards still work). Bad idea. Why? Because cash advances or purchase of luxury items over certain amounts within 70 to 90 days of filing can preclude a discharge of those debts. In addition, it will make any bankruptcy more expensive. So, play it straight.
Now is the time to speak with an experienced bankruptcy attorney.
Posted by Kevin on October 12, 2014 under Bankruptcy Blog |
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.
Posted by Kevin on October 1, 2014 under Bankruptcy Blog |
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.
Posted by Kevin on September 22, 2014 under Bankruptcy Blog |
Filing Chapter 7 bankruptcy while letting go of your home can be a smart combination.
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Chapter 13—the three to five year partial payment plan—consists of an entire toolbox full of different tools to help people hang onto their homes. But that may not be what you need. After getting informed about how those tools would work (or not work) in your situation, you may decide that it’s best for you to walk away from your home. If so, here are some advantages of doing that in conjunction with filing a Chapter 7 bankruptcy:
- Have more control over when you leave:
If you have a foreclosure sale date scheduled, or a foreclosure lawsuit pending, usually you would have no say about when you have to leave. You could even be forcibly evicted by county sheriff deputies. However, if you file a Chapter 7 bankruptcy case, that will delay the foreclosure sale or lawsuit, at least for a few weeks, and possibly for a matter of months. That alone could save you a couple thousand dollars in rent. Also, after a bankruptcy filing, your mortgage lender may well be willing to negotiate a departure date convenient to you, in return for avoiding their need to rack up a lot of attorney fees. As part of the deal you may be willing to sign over your title through a “deed in lieu of foreclosure,” with no risk of further liability since your bankruptcy case is discharging any remaining debt.
- Avoid house-related debt following you:
Depending on your situation, and on your local state laws, after surrendering a house without bankruptcy you risk being saddled with debts coming at you from various directions. Sometimes you could be liable for any deficiency on the first mortgage. Surrendering your house to a first mortgagee does not take you off the hook on a second mortgage. You could also be liable on other debts related to the home—such as unpaid utilities, contractor liens, property tax liens, or homeowner association dues. Many of these debts would be discharged if you filed a bankruptcy.
- Have an attorney in your corner:
Fair or unfair, your mortgage lender will likely treat you better when it knows you are being advised and represented by an attorney (assuming that you would be filing your Chapter 7 case through an attorney). You will have the peace of mind that comes from knowing your rights, understanding what will happen when, and having an advocate available to get directly involved as needed.
- Get a fresh financial start instead of a continuation of a vicious cycle:
If you are surrendering your house and reducing your monthly cost of keeping a roof over your head, you may be tempted to think you don’t need a bankruptcy. Perhaps you don’t. But if you have fallen so far behind on you mortgage that it’s gotten to the point of foreclosure, the odds are that you need more help than giving up your house alone will achieve. You at least owe it to yourself to get legal advice about your financial situation and your realistic options. You can then be pro-active to turn your situation around rather than waiting for the other shoe to drop.
Think about it
Posted by Kevin on September 9, 2014 under Bankruptcy Blog |
Saving the vehicle sometimes is not the best option, so Chapter 7 bankruptcy gives you a safe way out.
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Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” each provide ways for you to catch up on and keep your vehicle if you’re struggling to keep up on the payments. But in spite of these options, it may simply be the best for you to surrender the vehicle and write off what you still owe along with the rest of your debts.
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Bankruptcy gives you a variety of options to deal with a vehicle that you’ve fallen behind on but need to keep. If you’re only a payment or two behind, under a straight Chapter 7 bankruptcy you would likely be given about two months to catch up and then thereafter keep up on the regular payments once you’ve written off the rest of your debts so that you can better afford to do so. Or if you’re further behind, a Chapter 13 payment plan would give you much longer to catch up, and if the loan is more than two and a half years old may even allow you to both make smaller monthly payments and lower the balance through a “cramdown.” Bankruptcy can usually give you a good way to keep a needed vehicle.
Understandably the focus in bankruptcy is usually on how to save your home, or vehicle, or something else of importance. But one of the advantages of bankruptcy is that it can free you from some of your assumptions. One such assumption is the usually accurate one that if you surrender a vehicle to its creditor you will continue to owe a lot of money. This is usually true because 1) vehicles tend to depreciate faster than their loan balances are paid down, 2) once they are surrendered they are usually sold at auto auctions at bargain basement prices, and 3) your account is charged all the surrender and sale costs, all of which usually leave you owing a shockingly high “deficiency balance” after the surrender. The fact that you would continue to owe a lot on a vehicle you no longer have is obviously a big disincentive to surrender it in the first place. But since a Chapter 7 bankruptcy will reliably discharge (legally write-off) any such deficiency balance, that disincentive can go out the window. You can ask plainly: is it better to hang onto this vehicle with the options that Chapter 7 and 13 provides you, or is it just better to walk away owing nothing. Bankruptcy opens you up to both sets of possibilities.
Posted by Kevin on July 5, 2014 under Bankruptcy Blog |
Chapter 7 bankruptcy can often also wipe judgment liens off the title to your home.
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Liens against your property—such as the lienholder’s lien on your car or truck title, or your home lender’s trust deed on your home’s title—generally are not wiped out with a bankruptcy filing. The bankruptcy discharge (write-off) of debts ends your personal liability on that debt but does not end a creditor’s rights in any collateral. Accordingly, a judgment lien—the lien that attaches to your home if a creditor gets a judgment against you—gives the judgment creditor certain rights to your home, including often the right to foreclose on it. But under some circumstances judgment liens CAN be wiped away, or voided, during bankruptcy, so that the creditor would have no such further rights against your home.
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If you still want to make good on your promise to take charge of your financial life, this and the next few blogs may help. They are about less familiar benefits of filing bankruptcy, starting with some less familiar benefits of Chapter 7.
The Chapter 7 version of bankruptcy usually achieves two main goals—it stops all or most of your creditors from collecting against you and your assets, and it “discharges,” meaning it legally forever wipes out, all or most of your debts. In most cases, that’s pretty much what it does for you, and that’s often just what you need. In contrast, Chapter 13—the “adjustment of debts” payment plan—is the creative, lots-of-tools-in-the-toolbox version of bankruptcy, often significantly better for dealing with complicated situations. But Chapter 13 takes at least 3 years compared to as short as 3 months for Chapter 7, it costs at least 3 or 4 times more, and is less likely to be completed successfully.
So here’s a tool which is available under Chapter 7—getting rid of certain judgment liens on your home. Here are the conditions for this to happen:
- You must qualify for and claim a homestead exemption on the real estate upon which you have the judgment lien.
- That lien must be a “judicial lien,” which usually means one gotten through a court judgment, but is specifically defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
- The debt underlying this judgment lien cannot be for child or spousal support, or for a mortgage foreclosure.
- The judgment lien at issue must “impair” the homestead exemption, which the law defines to mean:
- the value of all the liens on the house, including the judgment lien
- PLUS
- the amount of homestead exemption that you could claim if there were no liens on the house
- MUST BE MORE THAN
- the value of the house (assuming you are its sole owner).
So for example, if:
- the judgment lien is $20,000 and your mortgage is $150,000
- PLUS
- your available homestead exemption is $30,000
- that $20,000 judgment lien would be impairing the homestead exemption and could be voided in bankruptcy
- as long as your house was worth less than $200,000.
Lastly, please understand that merely filing the Chapter 7 bankruptcy will discharge the underlying debt that caused the judgment and its lien. But voiding the judgment lien itself takes an extra step. In NJ that means filing a motion and obtaining an order or else the judgment lien will continue to exist against your home. Also, that motion to void the judgment lien needs to be filed while your Chapter 7 case is still open and active, which usually means within about 90 days after your case is filed. Finally, lawyers usually charge a bit more than the ordinary flat fee for providing this service since it entails additional work.
So, if you own a home, find out if you have a judgment lien against the title. If you do, talk to a bankruptcy attorney about whether that lien could be voided in a Chapter 7 bankruptcy case. If so, gaining this very important extra protection for your home could make filing bankruptcy that much more beneficial for you.
Posted by Kevin on April 21, 2014 under Bankruptcy Blog |
From various sources, I have been reading about the results of a study done by PayScale concerning the financial return (or lack thereof) of various types of college degrees. Given that student loan debt now exceeds one trillion dollars, this study (and others like it) should be considered by both prospective college students and their parents.
A little aside. My father was of the WWII generation. He did not go to college. However, he pounded into me from an early age that if I wanted a good job, I had to get grades and go to college. Did a good job follow from a college degree? Or was it that there was roughly a one to one ratio between good jobs and the number of people going to US colleges in the 1950″s?
I started college in 1969 and finished my JD-MBA in 1978. By that time, there had been an explosion in the number of college students. And while good jobs increased because the economy grew, there no longer seemed to be a one to one relationship between college grads and good jobs. That was the bad news. The good news was that college and law school were far less expensive than they are today. With the help of my father’s union scholarship and my parents’ financial support, I was able to finish college and two grad schools with less than $7,000 of debt- a manageable sum. Nowadays, however, young people are finishing college with over $30,000 of debt. Forget about graduate school. Some students who attend professional schools (medicine, law, business) are coming out with over 100K of debt. Unbelievable.
The PayScale study indicates that certain degrees, such a engineering, pretty much insure that the graduate will earn at least 500K more over a 20 year period than someone who did not attend college. At the same time, an arts or humanities degree from a lower tiered college may translate into a six figure deficit vis-a-vis high school graduates. OUCH!
Predicatably, graduates of elite schools including the Ivies fare better than graduates of lower tiered schools. Moreover, a study by McKinsey, highlighted in a recent article in The Economist, points out that in this less than stellar job market, 42% of recent graduates are in jobs that do not require a 4 year degree.
What to do? In the long run, study hard (or run 4.4 in the forty yard dash for a football scholarship) so your chances of getting into a top tier school are better. In the short term, however, students and parents have to be smart about the type of financial commitment that college is. Explore financial aid opportunities especially through local clubs or civic organizations. For example, our local Rotary awards scholarships to about 10 students per year. Second, look into community colleges for the first two years. You can test your abilities for two years at a pretty reasonable price. If you do well, you can transfer into a 4 year degree program in your third year. As a transfer with a high GPA, not only will you be in a better position to get into a school that may have been out of reach out of high school, you may be able to negotiate a better financial aid package.
Finally, you have to be on top of your student loans once you graduate. The last thing you want to do is fall into default. More than that, you would want to be pro-active in finding the right repayment plan which will allow you to pay your student loans and not live in poverty. Do not shy away from seeking expert help in this area. It may be money well spent.
Posted by Kevin on April 16, 2014 under Bankruptcy Blog |
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.
Posted by Kevin on April 11, 2014 under Bankruptcy Blog |
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.
Posted by Kevin on April 7, 2014 under Bankruptcy Blog |
The risk that creditors will not allow you to discharge some of their debts can be minimized through smart timing of your bankruptcy.
One of the most basic principles of bankruptcy is that honest debtors get relief from their debts, dishonest ones don’t. One way you can be “dishonest” in the eyes of the bankruptcy law is to use credit when, at that point in time, you don’t intend to pay it back. That makes sense. Each time you sign a promissory note or use a credit card you are directly stating in writing, or else strongly implying, that you promise to pay the debt you are then creating. That makes moral common sense. And it’s the law: a creditor can challenge your ability to write off a debt that you did not intend to pay when you incurred it.
Creditors Have the Burden of Showing Dishonest Intent
But most of the time when a person takes out a loan or uses a credit card, they DO intend to pay the debt. The law respects that reality by holding that most debts are discharged (legally written off) unless the creditor can prove to the court that the debtor had bad intentions when incurring the debt. So, for example, if a person completes a credit application with inaccurate information, for the creditor to successfully challenge the discharge of that debt it would not only have to show this inaccuracy was “materially false,” but also that the person provided that information “with intent to deceive” the creditor. See Section 523(a)(2)(B) of the Bankruptcy Code.
Dishonest Intent Inferred from When You Incurred the Debt
However, in the delicate balancing act between the rights of debtors and creditors, the law also recognizes that it’s quite hard to prove an “intent to deceive.” So the Bankruptcy Code gives creditors a significant, although limited, advantage when consumer purchases or cash advances are made within a short period of time before the bankruptcy filing. A debtor’s use of consumer credit during that period is presumed to have been done with the intent not to pay the debt, on the theory that the person likely was considering filing bankruptcy at the time, and likely wasn’t planning on paying back that new bit of debt. So the statute says that this new portion of the debt is “presumed to be nondischargeable.”
Limitations on the “Presumption of Fraud”
This presumption is limited in lots of ways:
- Applies only to consumer debt, not debts incurred for business purposes.
- Covers only two narrow situations:
- 1) cash advances totaling more than $750 from a single creditor made within 70 days before filing bankruptcy;
- 2) purchases totaling more than $500 from a single creditor made within 90 days before filing bankruptcy, IF those purchases were for “luxury goods or services,” defined rather broadly as anything not “reasonably necessary for the support or maintenance of the debtor or a dependent.”
- The debtor can override the presumption by convincing the court—by personal testimony and/or other facts—that he or she DID, at the time, intend to pay the debt.
So there is no presumption of fraud, and no presumption of nondischargeability of the debt, if cash advances from any one creditor add up to $750 or less within the 70-day period, or if credit purchases for non-necessities from any one creditor add up to $500 or less within the 90 days. See Section 523(a)(2)(C). This means that one simple way to avoid the presumption is to wait until enough time has passed before filing bankruptcy so that you get beyond these 70- and 90-day periods. That is, this is easy unless you have some urgent need to file the case. Either way, your attorney will help determine when you should file your case.
Possible Creditor Challenge Even Outside the Presumption
With all this focus on the presumption, be sure to understand that even if your use of credit doesn’t fit within the narrow conditions for the “presumption of nondischargeability,” a creditor could still believe that the facts show that you did not intend to repay a debt, or that you incurred the debt dishonestly in some way. However, these kinds of challenges are relatively rare because:
- As stated above, the creditor has the burden of proof, and it’s not easy for it to prove your bad intention;
- The creditor can spend a lot of money on its attorney fees to make the challenge, with a big risk that the debts will just be discharged anyway; and
- The creditor may also be required to pay YOUR attorney fees in defending the challenge if it loses. See Section 523(d).
Posted by Kevin on April 4, 2014 under Bankruptcy Blog |
To qualify for Chapter 13, you must be an “individual with regular income, meaning that your income is sufficiently stable and regular to enable you to make payments under a Chapter 13 plan. That requirement of a “stable and regular” income means not only at the time of filing, but for the entire duration of the plan (36 to 60 months). In a way, every Chapter 13 is a leap in faith that the debtor’s financial situation will be stable (or better) through the duration of the plan. Of course, life throws you curve balls. You lose a job, or your hours are cut. You or a member of your family gets sick and insurance does not cover the whole bill. The car breaks down-more than once. Your wife has to quit her job to take care of her sick mother. Whatever. The Code takes this into account. How? One way is by allowing you to convert your Chapter 13 to a Chapter 7.
Here’s an example to illustrate this. You own a home and have two mortgages. You are $5,000 behind in payments on your first mortgage (balance $250,000) and cannot remember when you last paid the second (balance of $75,000). You owe $25,000 in credit card bills, and another $10,000 in medical expenses that the insurance did not cover. The home is worth a less than the first mortgage. You had been laid off, but got a new job, and are starting to get significant overtime. But now, almost miraculously the debt collectors are calling again. You are making enough to take care of that first mortgage, your current expenses, and if everyone tightens belts, a little more, say $250 per month.
Chapter 13 may be the answer. How, you say. Even if everything goes right, what am I going to do about that second mortgage? Chapter 13 gives you the power to “strip” the second mortgage; that is, convert the second mortgage secured debt into unsecured debt. Then, the second mortgage gets paid pro rata with the credit cards and medical bills. How much? What ever is left over after paying your current monthly bills, your first mortgage arrearages, and the fee to your lawyer and the trustee. Could be very little. Plus the “second mortgage strip” also lowers the debt against the home by the amount of that second mortgage, bringing the debt down closer to the home’s market value. Seems to satisfy both your short term and long term goals. Chapter 13 looks good, so you file under that chapter. You know it is going to be a bit of a stretch, but if the stars line up right, you get to keep your home and discharge your debts.
15 months into the plan, your boss cuts back on most of your overtime. You can’t even pay the first mortgage much less the trustee. If the case is dismissed, there is no more automatic stay so your creditors will come after you because you now have wages that can be garnished. What to do?
The Bankruptcy Code explicitly states in that a Chapter 13 debtor may convert a case under this chapter to a case under chapter 7 at any time. Any waiver of the right to convert under this subsection is unenforceable.
Not a perfect solution, by any means. However, better than being thrown to the wolves. Let’s look at the scenario under the converted Chapter 7. First, you do not have to make any more payments to the trustee. That comes out to $3000 per year. Second, your Chapter 7 case is over in about 3 months and you most probably get a discharge. That means that you have knocked out all your debts (mortgage, credit card and medical).
BUT, the Code differentiates between the debt and the security for the debt. The debt is discharged but the security (mortgage) remains on the property. Unless you can make a deal with the mortgagees, you will probably lose your home. But you will not owe any deficiency on the first mortgage or anything on the second. Moreover, you will knock out the credit card and medical debt.
Now, if you work with experienced bankruptcy counsel, he or she will lay out this scenario in a way that you know or should know that you are taking a “shot” to save your home. If it works, God bless. If not, you switch into a 7, get your discharge and move on with your life.
So conversion to Chapter 7 can be a decent result when the goals of Chapter 13 cannot be met, either because of unexpected circumstances or because the debtors took some calculated risks which did not go their way.
Posted by Kevin on March 25, 2014 under Bankruptcy Blog |
One advantage of filing a Chapter 13 case is that you can get out of it “at any time.”
Chapter 13 comes with a right to dismiss. This means that at any point of your case you can get out of the case and out of the bankruptcy system altogether. Since this type of bankruptcy generally takes three to five years to complete, and involves projecting your income and expense that far out into the future, you’re only being sensible to ask what happens if your financial circumstances change during that period.
There are a number of other options for dealing with changes in your income and expenses, such as making adjustments in your Chapter 13 plan, or converting your case into a Chapter 7 one. There’s even something called a “hardship discharge” which in limited circumstances allows you to complete your case early. We’ll look at these other options in future blogs.
Dismissing your case is probably the most extreme of all the options. But it can be the best one in some situations.
If you dismiss your case, here are some of the main consequences:
- Once the bankruptcy judge signs the order dismissing your case, you no longer need to make payments under the Chapter 13 plan, and neither the court nor the Chapter 13 trustee has any further jurisdiction over your income, your tax refunds, or anything else addressed in your Chapter 13 plan.
- You lose the immediate benefit of being in a bankruptcy case, the “automatic stay” preventing your creditors from collecting on their debts and repossessing or foreclosing on any collateral. So before dismissing your case, be sure you know how each of your creditors is likely to act in response to the dismissal.
- Because under Chapter 13 you do not get a discharge of your debts until successful completion of the case, if you dismiss your case you will owe all your creditors as before except to the extent that they received payments during the case. Most interest and penalties stopped during the Chapter 13 case will usually be able to be added onto your debts, including for the period of time that you were in the case.
So why would somebody ever want to dismiss their Chapter 13 case? Simply because in some situations the advantages of dismissal outweigh any disadvantages. Chapter 13 cases can take such different forms and be filed for so many different reasons that it’s impossible to give a neat and tidy answer to this. So here is one scenario that illustrates when a dismissal can be the best choice.
Assume that a single mom with a young child has a vehicle loan, a home mortgage, and owes back income taxes. During a period of 10 months of unemployment she had managed to keep current on her vehicle loan because that was her absolutely highest priority. But while she was unemployed she could only do this and still take care of her necessary living expenses by not paying her mortgage. So she fell behind 10 payments of $1,500, or a total of $15,000. She also owed $2,000 to the IRS for the prior year’s income taxes because of not paying any withholding on her unemployment benefits. So she filed a Chapter 13 case a year ago in order to have three years both to catch up on that $15,000 mortgage arrearage and to pay off the income tax. She continued paying the vehicle loan so she’s still current on that.
But now she got a job offer in a neighboring state, where her parents live, who could help raise her child. So she’s ready to surrender the home to the mortgage company, and under the terms of her mortgage she would owe them nothing if she did so. The income from her new job would be enough to allow her to continue making her vehicle payments, and to set up an installment payment plan with the IRS to pay off the tax debt outside of bankruptcy. With her changed circumstances, and all her creditors taken care of, a dismissal of her Chapter 13 case would be appropriate and the best option here.
Posted by Kevin on February 20, 2014 under Bankruptcy Blog |
You have some wiggle room if you either want to get out of your bankruptcy case or change to the other Chapter.
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After starting your bankruptcy case, your circumstances could suddenly change or for some other reason you may no longer want to be in the bankruptcy case that you’re in. Getting out of the bankruptcy court altogether—dismissing your case—is not very easy in a Chapter 7 case, easier in a Chapter 13 one. Changing from one Chapter to the other—converting the case–is usually allowed. We start today with some reasons why you might want to dismiss or convert, and then in the next two blogs talk about dismissal and conversion first under Chapter 7 and then under Chapter 13.
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Why Dismiss or Convert?
To put this into context, what types of situations would lead to a person to want to get out of a bankruptcy case after presumably giving the decision a lot of thought beforehand?
Although some situations could apply to both Chapter 7 and 13, these two procedures are very different in two very practical ways so that the situations that would motivate you to get out of the case tend to be different. The two big differences are their length and likelihood of successful completion:
• most Chapter 7 cases usually lasts only about three months, compared to three to five years for a successful Chapter 13 case; and
• most Chapter 7 cases are completed successfully (at least those where the debtors are represented by an attorney), while a significant percentage of Chapter 13 cases are not.
Why Would You Want to Dismiss or Convert Under Chapter 7?
Under Chapter 7 “straight bankruptcy,” there’s a lot less that can go wrong and a lot less time for your circumstances to change. The focus is on your assets and debts at a fixed moment in time, at the point your case is filed. So if a careful analysis of your financial situation at that time indicates that your case meets the requirements of Chapter 7, not much should change that.
Here are some problems that can nevertheless arise making you wish you could get out of your Chapter 7 case:
• Although assets are fixed as of the date of filing, under Section 541(a)(5) of the Bankruptcy Code, if a relative dies within 180 days of the filing of your case leaving you as the beneficiary of an inheritance or a life insurance policy, that inheritance or insurance proceed becomes available to pay your creditors.
• If shortly after filing your case you have an accident and incur significant new medical debts because of having insufficient medical insurance, the new debt cannot be included and discharged in your case because that debt did not exist when your case was filed.
• You may be unaware at the time your case is filed that you have a legal right to a valuable asset, for example you did not know that your parents’ vacation home had been secretly deeded to you and your siblings.
Why Would You Want to Dismiss or Convert Under Chapter 13?
Under Chapter 13 “adjustment of debts bankruptcy,” there’s a lot more going on and so a lot more that can go wrong than in a Chapter 7 case. A Chapter 13 plan lays out how much and when the various creditors will be paid (if at all), and creditors can object to the plan and sometimes force it to be changed before it’s approved by the bankruptcy judge. Then you have to comply with the terms of the plan, over the course of three to five years, which give a lot of time for your circumstances to change. The focus is on your financial life not at a fixed moment in time but rather throughout the years of your case. Your Chapter 13 plan usually assumes that your income and expenses will stay the same, or else sometimes tries to predict how they will change into the future. Either way, those assumptions come with risk.
So all kinds of things can happen which could make you wish you could get out of your Chapter 13 case, but here are some representative examples:
• Your plan is designed around your desire to save your home, but a year or so later you find a job which requires you to move, taking away the primary purpose of your case.
• You filed a joint Chapter 13 case with your spouse, but two years later you go through a divorce, totally changing your financial life.
• Your income is significantly reduced permanently; so much so that even amending your Chapter 13 plan is not feasible, making you no longer eligible for Chapter 13.
• Your income is significantly increased a year into your case; so much so that you become obligated to amend your plan to pay most or all of your debt.
Again, the next two blogs will be about getting out of Chapter 7 and then Chapter 13, in situations like the examples given above.
Posted by Kevin on February 3, 2014 under Bankruptcy Blog |
Each spouse in a marriage with significant tax debts has his or her self-interest, which may need a different solution than the other spouse.
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Married couples can and often file bankruptcy together. Doing so when they both owe substantial income taxes may especially makes sense. But each spouse needs to understand his and her own rights and options before deciding whether to file bankruptcy or not, and if so whether to join in the other’s bankruptcy or file his or her own case.
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If a couple owes a lot of income taxes, often it is because of the actions of one of spouses—such as one spouse running a business into which that spouse puts his or her heart and soul but still eventually failed. The spouse who is “at fault” may well be feeling deep frustration and guilt, while the other spouse is experiencing feelings of anger, disappointment, and even betrayal. This extra source of conflict can not only make their situation more emotionally challenging but legally as well.
This blog suggests some principles to consider if you’re in a similar situation.
The Two Spouses Each Have Their Own Self Interest
To state what is probably obvious, just because two people are married does not mean that their financial situations are the same, or that their legal problems and the potential solutions are the same. While some spouses do have close to identical situations—if they are jointly liable on all the same debts and share ownership in all their assets—often that’s not the case. Each person can have his or her own separate debts and to some degree his or her own assets, making their financial situations very different. And beyond those tangible differences, each person can have different goals and different attitudes about how to deal with his or her individual problems and their ones in common.
Because income taxes are such an unusual debt, they can greatly complicate the self-interest of each spouse. Taxes are unusual in how they are incurred. For example, a tax debt can arise primarily out of the actions of one of the spouses, with the other spouse becoming completely liable by simply signing a joint tax return. That spouse might eventually be able to get out of that liability through the “innocent spouse” exception, another complication not available with any other kind of debt. Taxes are also quite unusual in how they are treated in bankruptcy. There are relatively complicated rules about what taxes will and will not be discharged, and how each portion of each tax account can be handled under Chapter 13.
Each nuance of these rules can create different self-interests for each spouse.
The Two Spouses May Each Need Their Own Bankruptcy
The two spouses’ different self-interests may well lead to different solutions. Sometimes that may mean one person filing bankruptcy and the other not, or one person filing a Chapter 7 case and the other a Chapter 13 one.
The Two Spouses Could Need Separate Attorneys
Without getting deeply into delicate attorneys’ ethical rules about conflict of interest, attorneys need to be careful about simultaneously representing any two people who have different interests. This is true regardless if these two people are married and have some common interests. In the end the two may end up filing a joint bankruptcy because it is in their individual and mutual best interest to do so. But before getting there each person must be made fully aware of his or her individual rights and legal options, whether this happens through two separate attorneys or through a single one. One or both spouses may decide to sacrifice some of their individual interests for their common good, but can only do so when their rights and options have been clearly laid out for each of them.
Posted by Kevin on January 25, 2014 under Bankruptcy Blog |
Finding the best way out of this seeming Catch-22 depends on a full understanding of your unique situation and your goals.
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The last blog explained that filing a bankruptcy by yourself immediately protects YOU from IRS collection activity but does NOT protect your spouse. Similarly the legal write-off (“discharge”) of any tax applies to the person(s) filing the bankruptcy but not to your spouse if he or she does not either join you in your bankruptcy case or else files his or her own case.
That makes perfect sense—you don’t get the benefit of bankruptcy if you don’t file bankruptcy! So the simple solution is for spouses to file bankruptcy together. But there are many situations where that’s not so simple. The next few blogs discuss some of the practical problems that can arise, and how to resolve them.
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One Spouse Has Most of the Debts, the Other May Have Assets
Often one spouse is the only one individually liable on most of the debt. Or one spouse is solely liable on all debt except they are jointly liable on the secured debts—their mortgage and/or vehicle loans–that the couple intend to keep paying on. These situations can happen when one spouse incurred all the debt from operating a business that failed, or that spouse was simply the primary income source, and/or the one with good credit.
In these situations only the spouse whose debts would be discharged would directly benefit from a bankruptcy filing, so the other is appropriately reluctant to be in a bankruptcy that appears to provide him or her no benefit.
But now add two more ingredients to this scenario: 1) a large personal income tax debt that is old enough and meets the other conditions so that it can be discharged in bankruptcy, which both spouses owe because they both signed the joint tax return; and 2) a significant asset not protected by the applicable exemption owned separately by the spouse with less debts. To make this clearer, let’s say the income tax debt is $25,000 for the 2008 tax year, and the one spouse’s separate asset is his or her share in the childhood vacation home, inherited before the marriage, with this spouse’s share being worth about $20,000.
Seeming Catch-22 for Spouse with Less Debt but Liable on Tax Debt
Without the joint income tax debt, the spouse with little or no other dischargeable debt would not want to join in a Chapter 7 bankruptcy case because his or her share of the old family vacation home could well be claimed by the bankruptcy trustee and sold to pay the couple’s creditors. But with the existence of the joint tax debt, a Chapter 7 filed by the other spouse alone would forever discharge that tax debt as to THAT spouse only, leaving the non-filing spouse owing all of the tax—and the continually accruing interest and penalties—by him- or herself. Clearly not a good result.
Indeed the situation on the surface looks like a Catch-22: the asset-owning spouse either joins in on the bankruptcy thus jeopardizes the asset, or else doesn’t join and is stuck with the tax.
Best Solution Depends on the Unique Facts of the Case
It’s in these tough situations that an experienced bankruptcy attorney becomes very valuable. Determining the best solution depends on thorough understanding of the law along with a careful analysis of all the facts of this case—such as whether the couple owed any other taxes and if so how much and for which years, whether they owed any other “priority” debts (including back child or spousal support payments from a prior marriage, or employee wages from the failed business), their current income and expenses, and lots of other potentially relevant facts.
Posted by Kevin on January 18, 2014 under Bankruptcy Blog |
Filing bankruptcy with or without your spouse, and under Chapter 7 or Chapter 13, may affect what protection you each receive.
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The last few blogs have been about what happens if you file bankruptcy with or without your spouse, and whether you file under Chapter 7 or 13. Today’s blog addresses the protections you and your spouse get or don’t get from collection activity by the IRS (and any pertinent state income tax agencies) under those options.
The “automatic stay” which you get with any bankruptcy filing stops the IRS and state agencies from any further collection actions just like any other creditor. But to get this protection, whoever owes the tax has to be in on the bankruptcy filing. The co-debtor stay of Chapter 13 does not apply to income taxes, so that does not give any help to a non-filing spouse.
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The “Automatic Stay” Applies to Income Tax Debts
Some people have the misimpression that the IRS and other income tax authorities are exempt from the “automatic stay,” the protection from creditor collection you receive immediately when your bankruptcy is filed. Not true. If the IRS continues to pursue a tax debt after being given notice of a bankruptcy filing, it is breaking federal law just like any other creditor. And the bankruptcy court can order the IRS to pay damages if it does break the law. Since the IRS and similar state agencies have been punished for this in the past, they tend to follow the law and stop collections right when you file bankruptcy, like most other creditors.
There ARE some exceptions to the “automatic stay” that apply to taxing authorities—actions that they can still take in spite of a bankruptcy filing, but these actions are very limited.. They can “assess” a tax (determine the amount of tax) and send out a notice about it, make a demand for tax returns, send a notice of tax deficiency (but not act to collect on that deficiency), and conduct an audit (but again not act to collect any debt arising from the audit). So these permitted actions are deemed not to involve actual collection activity.
The “Automatic Stay” Applies Only to the Filing Spouse(s)
The “automatic stay” protects only the debtor—the person or persons filing the bankruptcy case, and his or her, or their, assets. On a jointly owed tax, if only one spouse files the bankruptcy, the IRS or state agency can continue pursuing the non-filing spouse as if the bankruptcy was not filed. And because the tax debt is jointly owed, the non-filing spouse can be required to pay the debt in full.
Chapter 13 “Co-Debtor Stay” Does Not Apply to Income Taxes
The lack of protection for the non-filing spouse is true both under Chapter 7 and 13, because the usual protections for non-filing “co-debtors” in Chapter 13 under the “co-debtor stay” do not work. As discussed a couple blogs ago, the ‘co-debtor stay” provides a way to protect even non-filing spouses from consumer debts owed jointly with a spouse filing under Chapter 13. But it’s inapplicable to income taxes owed to the IRS or other tax agencies, basically on the rationale that the “co-debtor stay” applies only to “consumer debts,” and courts have determined that income taxes are not “consumer debt.”
Applying the Stay Rules to Income Taxes
Because the tax agencies can pursue a non-filing spouse who jointly owes an income tax—under both Chapter 7 and 13—both spouses need to file bankruptcy whenever there is any significant joint tax debt.
Usually this means a joint filing—two spouses filing together on one bankruptcy case. But sometimes—when their financial circumstances are different enough, or perhaps when the marriage is not stable—they may find worthwhile for each to file a separate case, and maybe for one to file a Chapter 7 case and the other a Chapter 13 one.
Lastly, the IRS has been known to not pursue a non-filing spouse if the taxes are being paid in full through the other spouse’s Chapter 13 plan. But this would be done purely at the discretion of the IRS, and should not be counted on unless first carefully discussed with your attorney. But even in these situations, the non-filing spouse is on the hook for penalties and interest that can be wiped out in a Chapter 13 plan. This is yet another reason to include both spouses in the Chapter 13 filing.
