Posted by Kevin on August 20, 2017 under Bankruptcy Blog | 
You can usually get out of an ongoing Chapter 13 “adjustments of debts” bankruptcy case by simply asking to do so.
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Unlike Chapter 7, if you file a Chapter 13 case you can end it—“dismiss” the case—at any time, and in just about any circumstance. But why the difference?
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Explicit Right to Dismiss
Why can a Chapter 13 case be dismissed by the debtor? Because unlike with Chapter 7, Section 1307(b) of the Bankruptcy Code says so. And quite strongly.
“On request of the debtor at any time… the [bankruptcy] court shall dismiss a case under this chapter [13].”
Notice that the debtor can ask for a dismissal “at any time.” This implies that the request could come any time during the life of a Chapter 13 case, including when it might be particularly inconvenient for a creditor. Or whenever. Also notice that the court does not seem to have any discretion about whether or not to dismiss–it “shall” dismiss the case. Not “may” or “might” dismiss it, but “shall” do so.
An Absolute Right to Dismiss?
Actually there has been debate among bankruptcy judges about whether a court can ever prevent a Chapter 13 case from being dismissed on request of a debtor. And a number of judges have decided that in situations of serious abuse or fraud by the debtor, there are other provisions in the law that trump this section and prevent a Chapter 13 case from being dismissed. But still, in the vast majority of situations, a request by a debtor to dismiss a Chapter 13 case results in its near-immediate dismissal.
Why So Different Than Chapter 7?
But why does the Bankruptcy Code—the federal statute governing bankruptcy—provide for a right to dismiss a Chapter 13 case when it does not provide for Chapter 7 dismissal the same way?
Because (beyond the reasons given in the last blog related to Chapter 7) when Congress established the bankruptcy options, it wanted to encourage debtors to file Chapter 13 cases. This was in part so that they paid back at least some of their debts. Congress probably also recognized that filing a Chapter 13 case is generally riskier than filing Chapter 7. That’s mostly because it involves making payments diligently over the course of years, while not getting the reward of the discharge (legal write-off) of the debts unless successfully getting all the way to the end of it. To encourage taking on the risk of starting a Chapter 13 case, Congress made it easy to get out of it if things did not go as planned.
Posted by Kevin on June 28, 2017 under Bankruptcy Blog |
Here are 3 scenarios where a debtor tries to save his or her home. When is Chapter 7 “straight bankruptcy” enough, and when do you need Chapter 13 “adjustment of debts”?
Scenario #1: Current on Your Home Mortgage(s), Behind on Other Debts
Chapter 7: Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Stops those other debts from turning into judgments and liens against your home.
Chapter 13: Same benefits as Chapter 7, plus often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to “strip” (permanently get rid of) a 2nd or 3rd mortgage, so that you would not have to make that monthly payment, and paying little or nothing on the balance during the case and then discharging any remaining balance at the successful completion of your case.
Scenario #2. Not Current on Home Mortgage(s) But Only a Few Payments Behind & No Pending Foreclosure
Chapter 7: May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies and their servicers (the people you actually interact with) will agree to give you several months—generally up to a year—to catch up on your mortgage arrearages. Generally called a “forbearance agreement”—lender agrees to “forbear” from foreclosing as long as you make the agreed payments. Works only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if filing Chapter 7 will stop enough money going to other creditors so you will have enough monthly cash flow to pay off the mortgage arrearages quickly.
Chapter 13: Even if only a few thousand dollars behind on your mortgage, you may not have enough extra money each month after filing a Chapter 7 case to catch up quickly on that mortgage arrearages. If lender is inflexible about giving you more time to catch up, a Chapter 13 case forces them to accept a much longer period to do so—three to five years.
Scenario #3. Many Payments Behind on Your Mortgage(s):
Chapter 7: Not helpful here. Buys at best only two to three months or so. Also, no possibility of “stripping”a 2nd or 3rd mortgage.
Chapter 13: Assumes that you can at least make the regular mortgage payment consistently, along with the arrearages catch-up payments. As stated above, gives you up to five years to pay off the mortgage arrearages, Your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan and mortgage payments. Does not enable you to reduce the first mortgage payment amount, although in some situations you may be able to “strip” your 2nd or 3rd mortgage.
In my 30+ years of experience as a bankruptcy attorney, have seen Scenario #1 only once (was a close friend and he is still in his home). Usually see Scenario #3 because most debtors do not seek counsel until they are really “in the hole”. Be smart. When things start to go south, call an experienced bankruptcy attorney to learn your options.
Posted by Kevin on May 23, 2017 under Bankruptcy Blog |
In a Chapter 7 bankruptcy, the trustee sells non-exempt assets to pay your creditors. The Code provides certain dollar limit exemptions for your home, car, household items and the like. The problem for some debtors is that Chapter 7 may not exempt all their assets. Chapter 13 is often an excellent way to keep possessions that are not “exempt”—which are worth too much or have too much equity so that their value exceeds the allowed exemption, or that simply don’t fit within any available exemption.
Options Other Than Chapter 13
If you want to protect possessions which are not exempt, you may have some choices besides Chapter 13.
You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need, such as equipment or inventory from a business that you’ve closed. Surrendering an asset under Chapter 7 may also make sense if you have “priority” debts that you want and need to be paid—such as recent income taxes or back child support—which the Chapter 7 trustee would pay with the proceeds of sale of your surrendered asset(s), ahead of the other debts.
There are also asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures beyond the scope of this blog post.
Chapter 13 Non-Exempt Asset Protection
Under Chapter 13 you can keep that asset by paying over time for the privilege of keeping it. Your attorney simply calculates your Chapter 13 plan so that your creditors receive as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee.
For example, if you own a free and clear vehicle worth $3,000 more than the applicable exemption, you would pay that amount into your plan (in addition to amounts being paid to secured creditors such as back payments on your mortgage). You would have 3 to 5 years—the usual span of a Chapter 13 case—throughout which time you’d be protected from your creditors. Your asset-protection payments are spread out over this length of time, making it relatively easy and predictable to pay.
It gets better-in some Chapter 13s you can retain your non-exempt assets without paying anything more to your creditors than if you did not have any assets to protect. If you owe recent income taxes and/or back support payments (or any other special “priority” debts which must be paid in full in a Chapter 13 case), you can use these debts to your advantage. Since in a Chapter 7 case such “priority” debts would be paid in full before other creditors would receive any proceeds of the sale of any surrendered assets, if the amount of such “priority” debts are more than the asset value you are seeking to protect, you may well only need to pay enough into your Chapter 13 case to pay off these “priority” debts.
This is in contrast to negotiating with a Chapter 7 trustee to pay to keep an asset, in which you would usually have less time to pay it and less predictability as to how much you’d have to pay.
Chapter 7 vs. Chapter 13 Asset Protection
Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset, and other factors. Generally, this is not a DIY project. You need to speak with competent bankruptcy counsel to review your options
Posted by Kevin on April 17, 2017 under Bankruptcy Blog |
If your business needs bankruptcy relief, you have to start with basic questions about how your business was set up and its debt amount.
Sole Proprietorship
The most straightforward business bankruptcies tend to be those in which the business is a sole proprietorship. Your business is operated through you under your name or under an assumed business name (“doing business as” or “DBA”). So, for purposes of bankruptcy, if you operate a sole proprietorship, you file bankruptcy in your name and it will include your personal assets and liabilities and the assets and liabilities of the business.
Other Forms of Business
Basically, this includes corporations, partnerships and LLC’s (limited liability companies). In these cases, the business entity is the debtor. If the owner of the business is liable under guaranties, the owner might also need to file an individual bankruptcy.
Purpose of Bankruptcy
Once you have established what type of business entity is involved, the basic question is whether you want to utilize bankruptcy as a tool to continue in business or as a tool to liquidate and shut down the business.
The General Guidance
Beyond these initial points, here are some basic rules. They will help you be a bit more prepared when you come to meet with an attorney.
1. A corporation, or LLC, or partnership cannot file a Chapter 13 “adjustment of debts.” Only an “individual” can. So, if you operate a sole proprietorship, you and the business may be eligible for a Chapter 13 filing.
2. Chapter 13s are sometimes mislabeled “wage-earner plans,” but any source of “regular income” is allowed.” The requirement is simply “income sufficiently stable and regular to… make payments under a plan under Chapter 13.” So if your business income—combined with any other income—is even somewhat stable, you would likely qualify under this “regular income” requirement.
3. But you and your sole proprietorship CAN’T file a Chapter 13 case if your total unsecured debt is $394,725 or more, or if your total secured debt is $1,184,200 or more. (Note: these limits are adjusted for inflation every three years.) While these may seem like relatively high maximums, be aware that they include BOTH personal and business debts (since you are personally liable for all the debts of a sole proprietorship). Also, the amount of unsecured debt can include that portion of your mortgages and other secured debts in excess of the value of the collateral. So a $750,000 debt secured by real estate now worth $550,000 adds $200,000 to the unsecured debt total. In addition, if you want to file a Chapter 13 as an individual and you are the owner of a corporation, you may have to consider as your unsecured debts those debts of the corporation which you personally guaranteed.
4. If your debt totals are above one of the above debt limits, you can still file a Chapter 7 “straight bankruptcy” case for the business, but that means, for all intents and purposes, the business will shut down. Chapter 7 tends to be a better option for cleaning up after a closed business, whatever its legal form.
5. A corporation or LLC does not receive a discharge in a Chapter 7.
6. If your debt totals are above one of the Chapter 13 debt limits and you are trying to save the business, one option is a Chapter 11 “business reorganization.” for the corporation, LLC, or partnership. The disadvantages of Chapter 11 are that it is a hugely more complicated than Chapter 13 which translates into substantially higher legal, filing and Trustee fees, and the financial reporting requirements are more onerous. Bankruptcy courts have tried to address these shortcomings with streamlined “small business” Chapter 11s, but they are still often prohibitively expensive.
7. If you do end up filing a personal Chapter 7 case when owing substantial business debt, you may have the advantage of being exempt from qualifying under the “means test” (a test based on your income and allowed expenses) if your business debts are more than half of your total debts.
If you are trying to save your financially struggling business, it is crucial to get competent business bankruptcy advice, and to do so just as soon as possible. You have no doubt been working extremely hard trying to keep your business alive. You will need a solid game plan for using the bankruptcy and other laws to your advantage.
Posted by Kevin on April 15, 2017 under Bankruptcy Blog |
Most small businesses do not have any reason to file bankruptcy after they fail. Instead it’s the individual owner or owners of the business who may well have to think about bankruptcy.
Business Corporation Is No Shield for Owners of Small Businesses
Why does a small business owner sets up his or her business as a corporation? One reason is a concept called limited liability. The corporation is legal entity that is separate from its owners. A corporate debt is just that- it is a debt of the entity and not its owners. In other words, the investor-owners of the business are not liable for those business debts. That’s the theory.
But in practice it doesn’t work that way, not with small businesses. Why? Because:
- Many new businesses cannot get any credit at all, and so have to be financed completely through the owner’s personal savings and credit. This credit tends to include credit cards, second mortgages on homes, vehicle loans, and personal loans from family members.
- For those businesses fortunate enough to receive financing in the name of the corporation, the creditors will very likely still require the major shareholder(s) to sign personal guarantees. This makes the shareholders personally obligated if the corporation fails to pay. Common examples of this are commercial leases of business premises, major equipment and vehicle leases or purchases, franchise agreements, and SBA loans.
As a result, when the business cannot pay its debts, the individual shareholder(s) are usually on the hook for all or most of the debts of the business. The business corporation’s limited liability is trumped by the shareholders’ contractual obligations on the debts.
Ever Worth Filing Bankruptcy for the Business Corporation?
By the time most small businesses close their doors, they have run themselves into the ground and do not have much remaining assets. And often, what little is left is mortgaged, with the assets tied up as collateral, leaving nothing for the corporation’s general creditors. This applies not just to purchases and leases of assets, but also to bank loans which require a blanket lien on all business assets, and commercial premises leases with broad landlord liens.
Without any assets with which to operate, the business dies. Without any assets for creditors to pursue in the business, the debts die with the business, except to the extent the shareholders are personally liable.
But sometimes the business does still have substantial assets when it closes its doors. Assuming the business is in the form of a corporation or partnership and so is eligible to file its own Chapter 7 bankruptcy, doing so may be worthwhile for three reasons:
- A bankruptcy would enable the owners to avoid the hassles of distributing the corporate assets by passing on that task to the bankruptcy trustee.
- There are risks for the owner of a failing business in distributing the final assets of the business, which can result in personal liability for the owner. Filing bankruptcy avoids that risk because the bankruptcy trustee takes care of that responsibility.
- In some situations, a debt owed by the business corporation is also owed by the business’ shareholder. So when that debt is paid through the trustee’s distribution of assets, that reduces or eliminates the shareholder’s obligation on it.
Most of the Time You’re Left Holding the Business’ Debts
Regardless whether your business can or can’t file bankruptcy, and whether or not it ends up doing so, you will likely have to bear the financial fallout personally. By their very nature bankruptcies arising out of closed businesses tend to be more complex than straight consumer bankruptcies. So be sure to find an attorney who is experienced in these kinds of cases.
Posted by Kevin on October 17, 2016 under Bankruptcy Blog |
Here’s an unusual way of paying your income tax debt. The circumstances don’t line up very often, but when they do this procedure can work very nicely.
Generally, when filing a Chapter 7 “straight bankruptcy” a key goal is to keep everything that you own. You don’t want to surrender anything to the Chapter 7 trustee.
But sometimes you own something or a number of things that aren’t exempt. If so, one of your options may be to file a Chapter 13 case to protect your non-exempt asset(s). Almost always that option requires 3-5 years of payments.
If you don’t mind letting go of the non-exempt asset(s), a much quicker option is an “asset Chapter 7 case.” The bankruptcy trustee sells the non-exempt assets and uses the sale proceeds to pay your creditors.
What are the type of non-exempt assets that would fit into this scenario? It’s not going to be your home. (That is why we have Chapter 13) But, say you recently closed down a business. You may still own some of the business assets, but you have no use for them. Or you may own a boat or an off-road vehicle that, for whatever reason, you no longer want to keep. And you owe taxes that are otherwise non-dischargeable. That means the taxing authority will wait until the bankruptcy case is closed, and then start harassing you again for payment.
Under the Bankruptcy Code, in a Chapter 7, debts are paid according to a specific priority schedule. Taxes have priority over credit card debt, medical debt, or the deficiency on a car loan after repossession.
But, what types of debts have priority over taxes? The most important are the trustee commission and his/her professional fees. This could amount to a few dollars. Other than that, the most typical debts that have priority over taxes are unpaid child and spousal support.
So if you do not owe back support, then the trustee will pay your taxes after paying the trustee’s commission and professional fees to the extent funds are available.
Again, it’s not common that the “stars will line up”. But when it does, it can be a big plus. Also, this is not basic stuff so you will need an experienced bankruptcy attorney to navigate you through.
Posted by on September 8, 2016 under Bankruptcy Blog |
How to How to Get the Most Out of Your Bankruptcy
The focus in bankruptcy is on dealing with your debts, wiping out and getting a handle on the negative side of your balance sheet. But getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets—the positive side of your balance sheet. You can maximize this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE filing your bankruptcy case.
In my daily work as a bankruptcy attorney, I constantly meet with new clients who have sold, spent, or borrowed against important assets in desperate attempts to keep their heads above water. This is usually a mistake.
Bankruptcy Protects Assets
If you are like most people, bankruptcy will protect all of your assets. First, Chapter 7 “straight bankruptcy” protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 keep everything they own. Oddly enough, this is called a “no asset case” because the Trustee does not administer (= sells) any of the debtor’s assets. Second, if you have assets which are worth more than the applicable “exempt” amounts provided by law, Chapter 13 “adjustment of debts” can almost always protect those “non-exempt” assets as well. And third, if you do have assets that are not “exempt,” with wise pre-bankruptcy planning with a knowledgeable bankruptcy attorney, those assets may be all the better protected once your bankruptcy case is filed.
Get Legal Advice BEFORE Wasting Your Assets
If you are considering spending, selling, or borrowing against any of your assets to pay your debts, do you know whether that asset is one which would be protected in bankruptcy?
Consider a person in her late-50s cashing in a substantial amount of her 401(k) retirement plan to keep paying creditors when those creditors could be—and eventually are–written off in bankruptcy. That decision would likely significantly harm the quality of her retirement lifetime, with no tangible benefit to show for it. Or consider a husband and wife selling a free-and-clear vehicle that’s in good condition to pay creditors that eventually are written off in bankruptcy. Under certain circumstances, that vehicle may be exempted or a deal can be made with the trustee that allows you to keep the vehicle.
These kinds of decisions can have serious long-term consequences, so they shouldn’t be made without legal advice about the alternatives.
Posted by on April 28, 2016 under Bankruptcy Blog |
Chapter 7 and 13 are very different debt-fighting tools. But that doesn’t necessarily mean it’s obvious which is right for you.
The Not Always So Easy Choice
Once it is clear that you need bankruptcy relief, picking the right Chapter to file can be simple. Your circumstances may all point towards one option or the other. But sometimes it can be far from clear cut.
The First Impression IS Often Right
To be clear, when my clients first come in to see me, many have a good idea whether they want to file a Chapter 7 or a 13. There is lots of information available about this, including on this website. So lots of my clients come in having done some homework. Or at least they’ve heard something about the two Chapters and have an impression which makes sense to them. But sometimes after we have reviewed all the facts and options, the initial impression proves wrong.
An Illustration
Let’s say you have a home you’ve been struggling to hold onto for the last year or two, but by now have pretty much decided it wasn’t worth doing so any more. You’re seriously behind on both the first and the second mortgages. Like so many other people, the home is worth a lot less than you owe. In fact, let’s say you owe on the first mortgage a little more than what the home is worth, plus another $75,000 on the second mortgage, so the home is “under water” by that amount. Although for the last couple of years you’ve been hoping that the market value will start heading back up, but it’s just held steady. You and your family would definitely like to stay there, buy you absolutely can’t pay both mortgages. Besides it makes little economic sense to keep struggling to hang onto property worth $75,000 less than what you owe. So you’ve decided it’s time to give up on the home, and just file a Chapter 7 bankruptcy.
But then you meet with your bankruptcy attorney and find out some surprising good news. Because your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. You no longer have to make the monthly payments on it, making keeping your home all of a sudden hundreds of dollars cheaper each month. In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you can keep your home usually by paying very little—and sometimes nothing—on that $75,000 second mortgage. At the end of your case, whatever amount is left unpaid on that second mortgages would be “discharged”—legally written-off—so you own the home without that mortgage. You are debt-free, other than your first mortgage.
This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. The ability to keep your home by significantly lowering its monthly cost to you and bringing the debt against it much closer to its value could well swing your choice towards filing Chapter 13, contrary to your initial intention.
So, the Best Advice: Meet with Your Attorney with an Open Mind
Posted by Kevin on March 27, 2016 under Bankruptcy Blog |
The policy behind bankruptcy is to give an honest debtor a fresh start. The fresh start begins with the filing of the bankruptcy petition. By just filing, almost all attempts at collection of a debt are stopped by the automatic stay. The fresh start is completed when the debtor receives a discharge. A discharge means that the debt is cancelled, wiped out.
Not all debts are discharged, however. And a discharge does not mean, in certain circumstances, that a creditor cannot make some recovery. For example, in the case of a mortgage on your house, the bankruptcy discharge only applies to the debt. Say, you borrower $500,000 from the bank. You sign a note which is a promise to pay back the $500,000 with interest. That is the debt. And you sign a mortgage which is the collateral for the debt. The mortgage says that if you do not pay back the $500,000, the bank can take your house. The bankruptcy discharge knocks out the note, the debt, but not the mortgage. So, the lender can foreclose on the house and get what it is owed from the house. What if the house is only worth $300,000? Then, that is what the bank gets. The bank cannot come after you for the deficiency because the debt is discharged.
What debts are discharged in bankruptcy? Credit card debt, medical bills, personal loans without collateral, as stated above deficiencies on home mortgages but also deficiencies on car loans, most claims for injury based on negligence (car accidents, slip and fall, etc.), most judgments, business debts, guarantees, leases and older taxes for which you have filed a return which is not fraudulent, and the taxing authority has not filed a tax lien.
The Bankruptcy Code, however, does not discharge all debts. Some are dischargeable sometimes. Some are not dischargeable. For example, students loans are not usually dischargeable absent a showing of undue hardship. The burden is on the debtor to prove undue hardship which is not easy in New Jersey. Willful and malicious injury by the debtor to another, some debts incurred by fraud and/or dishonesty, and embezzlement may not be dischargeable, but the creditor must go to court to challenge the discharge. The bankruptcy judge makes the decision whether the debt is dischargeable in these cases.
Payroll and sales taxes are not dischargeable (called trust fund taxes). Other debts not dischargeable include income taxes recently incurred, domestic support obligations, criminal fines or restitution, injuries suffered when the debtor is intoxicated because of alcohol or drugs, post filing condo fees, and debts not put down in your schedules except in a no asset case.
So, if you are thinking about filing bankruptcy, you should speak first with an experienced lawyer so you can determine which of your debts may or may not be dischargeable.
Posted by on August 15, 2015 under Bankruptcy Blog |
If you had struggled to keep a business open, but have decided to throw in the towel, there’s a good chance you owe taxes. Here’s how to deal with them.
The Basic Choice
Let’s assume that you are seriously considering filing bankruptcy, but want to know your options.
You have two choices within bankruptcy for addressing tax debts after closing down a small business:
1. File a Chapter 7 case to discharge (legally write-off) all the debt that you can, which may include some of your tax debt, and then deal directly with the IRS and any other tax authorities to either pay the rest of the taxes in monthly installment payments or to negotiate a settlement (called an Offer in Compromise in the case of the IRS).
2. File a Chapter 13 case to deal with all your debts, which again may include the discharge of some of your tax debt, while you pay the rest of the taxes through a court-approved Chapter 13 plan, and being protected throughout the process from collection actions by the IRS and any other tax authorities.
Putting aside the many factors distinct from taxes, choosing between Chapter 7 or 13 comes down to this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case be small enough so that you could reliably make reasonable payments to the Internal Revenue Service (or other tax authority) which would satisfy that obligation within a sensible time period?
Answering that Question
The idea is that Chapter 7 is likely the way to go if you don’t need the long-term protection that comes with Chapter 13. In a Chapter 7 case, once that case is completed—usually only about three to four months after it is filed—the IRS/state can resume collection activity on the taxes that were not discharged in bankruptcy. You clearly want to avoid that. So a Chapter 7 makes sense ONLY IF before any collection activity begins you have arranged with the IRS/state to make payments, and 1) those payments are reasonable in amount, 2) your circumstances are stable enough so that you are confident that you will be able to pay them consistently, and 3) the length of time you would be making payments does not stretch out so long that the interest and penalties get too high.
Your attorney will be able to tell you—usually with high reliability—which tax debts will and will not be discharged in a Chapter 7 case, and thus how much in taxes you still owe. Then the next step is determining what the IRS/state would require you to pay in monthly payments, or possibly would accept in settlement. Your bankruptcy attorney may be able to give you guidance about this, or may need to refer you to a tax specialist (usually an accountant). Once you know the likely monthly installment payment amount—assuming you go that route—then you need to seriously consider whether that would be an amount you could reliably, reasonably pay, without incurring too much in interest and penalties before you paid it off.
If so, Chapter 7 likely is more appropriate. If not, then Chapter 13 is likely better because it gives you much more protection.
Posted by on July 21, 2015 under Bankruptcy Blog |
If you’re filing a Chapter 13 case, what choices do you have about your income tax refund?
Start with What Happens with Refunds in Chapter 7
To understand how tax refunds are treated under Chapter 13, it helps to compare how they are treated under Chapter 7. For more details about that, see my last blog. But to summarize, when you file a Chapter 7 bankruptcy usually you can keep your tax refund either by 1) smart timing of the bankruptcy filing, or 2) by the use of “exemptions.” If you wait to file your case until after you have received and appropriately spent the refund (carefully following the advice of your attorney on where to spend it), then this refund is not an “asset of your bankruptcy estate”—the bankruptcy trustee and your creditors have no claim on it. On the other hand, if the refund IS an “asset of your bankruptcy estate” but it is covered by an “exemption,” then the refund is protected and you get to keep it.
The Good News about Tax Refunds under Chapter 13
- As with Chapter 7, if you are flexible about when to file your case, wait until you have received and spent the refund appropriately.
- Better than Chapter 7, if you have to file your Chapter 13 case when your tax refund is still pending, you may be able to get permission to spend that refund—or part of it—for some urgent and necessary expense, instead of having it just go to pay creditors.
- Also better than Chapter 7, to the extent that you are required to pay all or part of the refund to the trustee, you would likely have some discretion about where that money would get paid, by including that in the terms of your Chapter 13 plan.
But This Comes with Some Not So Good News
- Chapter 7 focuses only on assets you own or have a right to when the case is filed. So it involves only the tax refunds that are pending at that point in time. Chapter 13 in contrast involves your income throughout the three to five years that your case is active. Since future tax refunds are considered part of your ongoing income, they need to be accounted for, and generally must be paid to the trustee to pay to your creditors.
Paying the Trustee Future Tax Refunds Is Usually Not So Bad
- Usually you can minimize the issue by reducing the payroll tax withholdings made by your employer, thereby reducing that tax year’s refund. As a result you are giving yourself more money each month for living expenses or for making your Chapter 13 plan payments.
- If you still do receive a relatively large refund during your case, and you have some out-of-the-ordinary urgent need for all or part of that money, you may be able to get trustee and/or court permission to use it for that purpose.
- Even to the extent that you still have refunds going to the Chapter 13 trustee during the years of your case, that money could well be doing some serious good work, such as:
- In many situations that additional money beyond your regular monthly plan payments allows you to complete your case faster, giving you an earlier fresh start.
- Important creditors would likely be paid more quickly—such as a child support arrearage or the payoff of a vehicle.
- The extra money from the refunds may be critical in allowing you to pay off the plan within the mandatory maximum 5-years, so that you can discharge all your remaining debts and have a successful Chapter 13 case.
Conclusion
As with Chapter 7, you can usually time the filing of your Chapter 13 case so that you can keep your current-year income tax refund(s). But if you can’t wait to file, then under Chapter 13 you tend to have more control over what happens with the pending tax refund(s). You do have the disadvantage of losing some control over the next few years of tax refunds, but that is less of a practical problem than it may seem for the reasons just outlined.
Posted by on June 11, 2015 under Bankruptcy Blog |
Did You Know…
- The first income tax was enacted during the Civil War, but it expired a few years after the war ended.
- The first peacetime income tax was passed in 1894, an effort of the Populists to get the wealthy to pay a greater share of the cost of the national government. It was a two percent tax on incomes over $4,000 (worth about $108,000 in today’s dollars), which at the time affected only about the top two percent of wage earners.
- The next year the U.S. Supreme Court overturned this law as unconstitutional, in a 5-4 decision. Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 161 (1895).
- A constitutional amendment to allow an income tax was proposed by the Republican President William Howard Taft, and the resolution for that amendment was passed by Congress with the Republicans in control of both the Senate and the House of Representatives.
- The entire Sixteenth Amendment states: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”
- After the required 3/4ths of state legislatures (36 of the 48 then-existing states) ratified it, on February 25, 1913 the Sixteenth Amendment was proclaimed ratified and became part of the Constitution.
So February 25, 2013 was the 100 year anniversary of the income tax becoming constitutional. Funny, I don’t remember any anniversary celebrations!
The MOST Interesting Facts
As the blogs in this series on taxes have been describing, bankruptcy can help you with income tax debts in a variety of ways. If it’s true that in life the facts that are most interesting to you are those that are going to help your pocketbook, then check out the following facts:
- Some income taxes CAN be forever discharged (legally written off).
- Taxes can be discharged under either Chapter 7 or Chapter 13, depending on which is right for you based on your other circumstances.
- The protection from creditors you receive by filing bankruptcy—the “automatic stay”—protects you from the IRS (and other tax creditors) like any other creditor.
- In a Chapter 13 payment plan, that protection can last for 3 to 5 years, giving you that much time to pay taxes that can’t be discharged.
- Even if you owe a tax that can’t be discharged, a Chapter 7 bankruptcy can put you in a much better position afterwards either to enter into a payment plan or negotiate a settlement.
- Chapter 13 usually stops accruing interest and penalties on tax debts that can’t be discharged, reducing the overall amount you have to pay.
- If you owe a number of years of income taxes, Chapter 13 is often an excellent tool because all your taxes—as well as all your other debts—are handled in one tidy package.
Taxes and bankruptcy DO mix, often greatly in your favor.
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 on April 30, 2015 under Bankruptcy Blog |
The last blog was about using Chapter 7 to discharge all or most of your debts other than taxes, so that afterwards you could afford to pay off the taxes through monthly payments to the IRS and/or the state. Or if you needed more payment flexibility, the usual alternative would be a Chapter 13 payment plan.
But there’s another possibility.
What if Neither Chapter 7 + Tax Payment Plan, Nor a Chapter 13 Will Work?
You may need a bankruptcy no matter what, to deal with debts other than taxes. But a Chapter 7 case may leave you owing too much income tax to be able to afford the minimum monthly payments that the IRS or the state would require. And a Chapter 13, as helpful as it can be for dealing with tough tax problems, may not be helpful enough. Chapter 13 requires payment in full of all “priority” debts—which includes non-dischargeable taxes—during the life of the case. That means a maximum of 5 years. You may just not have enough money available to pay into a Chapter 13 plan to do that.
So your best option may be to file a bankruptcy and then try to settle with the IRS and/or the state for less than you owe them.
Chapter 7 + Tax Settlement
A tax settlement would often be done in conjunction with and after a Chapter 7 bankruptcy filing, for three reasons:
1. If you owe a bunch of taxes, you are extremely likely to also owe lots of other debts, which need to be dealt with through bankruptcy.
2. Some of your older tax debts may be dischargeable. Trimming that debt away with a Chapter 7 bankruptcy would reduce the amount of remaining tax debt to be settled.
3. With an IRS Offer in Compromise or similar state procedure, you would need to show that you are pretty much focusing all your available financial resources on the settlement. It usually helps to get rid of your other debts to be able to do that.
Clean Your Slate of Other Debts So You Can Settle Your Taxes
You may owe too much in nondischargeable taxes to be able to make either the minimum permitted tax installment payments after the Chapter 7 case, or the necessary Chapter 13 plan payments. Then you may not have much choice except to attempt a tax settlement after completing a Chapter 7 case. (You generally cannot attempt an Offer in Compromise while in a Chapter 13 case.)
But even if you don’t seem to have much choice, before filing your Chapter 7 case you should still have a good idea what the IRS/state might accept once you make the offer a few months later. The basic settlement standard with the IRS is, as stated on its website, that “the amount offered represents the most we can expect to collect within a reasonable period of time.” Determining what that means in your situation, and so whether a particular settlement offer will fly, are delicate judgment calls, which is why you need to work with an experienced professional. Talk with your bankruptcy attorney about whether he or she regularly negotiates IRS Offers in Compromise and/or tax settlements with the state. If not, get a referral to a tax attorney or accountant who does.
Posted by Kevin on April 10, 2015 under Bankruptcy Blog |
The appropriately criticized Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) tried to prevent perceived abuses of the bankruptcy laws in a number of ways. One of them you’ve probably not heard about and can give you a bad surprise if you stumble into it.
The Bad Surprise
Beside the legal write-off (“discharge”) of your debts, the other big benefit you usually get from filing bankruptcy is protection from your creditors. That legal protection is called the “automatic stay,” and prohibits creditors from pursuing you or your money or your other assets. It goes into effect the moment your bankruptcy case is filed, and lasts throughout the life of your case—the few months of a Chapter 7 case and the few years of a Chapter 13 case (unless a creditor files a motion and gets special court permission, the so-called creditor’s “relief from stay”).
But imagine filing a bankruptcy and getting no protection at all from your creditors. Being in a bankruptcy case with the creditors still being able to call you, sue you, garnish your wages. Imagine this happening when you totally don’t expect it. That WOULD indeed be a bad surprise.
Having this happen is very rare, but considering the extreme consequences you want to make absolutely sure that it does not happen to you.
The Abuse Being Addressed
The problem arises in certain circumstances if you filed a prior bankruptcy case which got dismissed—closed without being completed. Before Congress put this law into effect, a very, very small minority of people filing bankruptcy–usually people without attorneys representing them—would file a series of bankruptcies, one after another, for the purpose of continuously delaying a foreclosure or some other action by a creditor. After their first bankruptcy case would get dismissed, they would file another one just in time to again impose the “automatic stay” and stop the foreclosure or other creditor action, and then repeat the cycle. You can see how this could be seen as an abuse of bankruptcy in general and abuse of the “automatic stay” protection in particular.
The Rules
So this is the law that Congress passed to counter this. It has two main parts.
First, if you are filing a bankruptcy case now, AND you filed ONE previous bankruptcy case during the one year before filing this new one, AND that previous case was dismissed, the “automatic stay” goes into effect when you case is filed BUT AUTOMATICALLY EXPIRES after 30 days UNLESS before that time we convince your bankruptcy judge that you meet certain conditions so that the “automatic stay” continues. See Section 362(c)(3) of the Bankruptcy Code.
Second, if you are filing a bankruptcy case now, AND you filed TWO OR MORE previous bankruptcy cases during the one year before filing this new one, AND those two cases were dismissed, then the “automatic stay” does NOT GO INTO EFFECT AT ALL with the filing of the new case. The “automatic stay” CAN go into effect AFTER the case is filed if within 30 days of the date of filing we convince your bankruptcy judge that you meet certain conditions so that the “automatic stay” gets imposed. See Section 362(c)(4).
The details of the conditions that must be met to continue or impose the “automatic stay” in these two circumstances are beyond the scope of this blog, but they require you to establish your “good faith” about why the previous case(s) was (were) dismissed and why you filed the new one.
Some Important Practicalities
If you have never filed a bankruptcy case, or have definitely not done so in the last year, then you don’t need to worry about any of this. And even if you have, these rules don’t apply to you unless your prior case(s) was (were) dismissed. Usually you would know if you’ve had a case dismissed.
Nevertheless, keep in mind that people get unexpectedly tripped up on these rules more often than you might think. It tends to happen one of three ways:
1) A person files a bankruptcy without an attorney, gets overwhelmed by the process and doesn’t follow through, so the case gets dismissed. The person may think he or she didn’t “really” file a bankruptcy case, or may simply forget about it under the stress of the time months later when filing another case.
2) A person sees an attorney, signs some papers, and the case gets filed at court, maybe without the person fully realizing it, and then gets dismissed because he or she doesn’t follow through and doesn’t stay in touch with the attorney. Months later, while seeing another attorney or trying to file a new case without one, the person isn’t aware that he or she had filed that previous case, and/or has forgotten all about it.
3) A person’s Chapter 13 case is dismissed because changed circumstances make it impossible to make the court-approved plan payments. Months later, when creditors are causing problems again he or she files a Chapter 7 without an attorney. Not realizing that the previous Chapter 13 case ended by being dismissed, in the new case the “automatic stay” expires after 30 days, letting all his or her creditors resume all collection activity.
To Be Safe…
Prevent any of this happening to you by 1) carefully considering whether you might have somehow filed a bankruptcy case within the last year, and 2) if there’s ANY chance that you did, telling your attorney in your new case right away. If you did file a case that got dismissed, there is a good chance that your attorney will be able to persuade the bankruptcy court to impose or retain the automatic stay. But that will only happen if your attorney knows about the issue in advance and determines whether your case will meet the necessary conditions.
Posted by Kevin on March 24, 2015 under Bankruptcy Blog |
You can file a new bankruptcy immediately after finishing another one, but why would you?
The last blog was about how long you have to wait to file a new bankruptcy case if you already filed one in the past. Those timing rules talk about both the earlier case and the subsequent case resulting in the discharge of your debts. As the last blog emphasized, if the earlier case did not result in a discharge, then you can file a second case at any time. The waiting periods do not apply.
Similarly, even after successfully completing one bankruptcy case and getting a discharge of your debts, you could file a second one at any time. You just would not be getting another discharge of your debts.
At first glance, this situation doesn’t seem to make practical sense.
Why Would You Ever Even Need a New Bankruptcy?
There are two reasons for a quick second bankruptcy.
First: you could unexpectedly incur one or more significant new debts during your bankruptcy case. Those debts could not be incorporated into that initial bankruptcy case because only debts in existence at the time of its filing can be. And you may need protection from those new debts. Since Chapter 7 cases usually last only about 3 to 4 months while Chapter 13 cases last 3 to 5 years, these interim debts are more likely to arise during the course of a Chapter 13 case. These would usually not be conventional consumer debts, because you would not likely be getting consumer credit while you’re in the middle of a bankruptcy case. Instead the new debts would tend to be unusual kinds like income taxes, perhaps student loans, obligations from a new divorce, and/or a claim against you from a vehicle accident or some other kind of liability.
Second reason for the second bankruptcy: the existence of debts that the earlier case did not write off. A Chapter 7 case could well leave still owing some income tax debt, child support arrearage, and/or student loans, for example. In some circumstances you may need the extended protection of a Chapter 13 case while you either pay or strategically avoid paying those debts, depending on which kind they are.
But What Good Is the Second Bankruptcy Without a Discharge?
Although a discharge of debts would seem to be the primary benefit of bankruptcy, it is by no means the only benefit. Instead, the “automatic stay,” protection from the collection efforts of your creditors, is sometimes benefit enough.
That’s primarily true under Chapter 13. First, the protection often extends for years instead of just the few months that it does under Chapter 7. And second, Chapter 13 provides a mechanism—the court-approved payment plan—to satisfy many of these kinds of new or non-discharged debts while under that protection.
For example, imagine that you owe a large income tax debt, plus some back child support, which were either incurred after the filing of your original bankruptcy case or were not discharged in that case. A new Chapter 13 case would essentially give you up to five years to pay those debts, usually without paying any further interest or penalties on the taxes, all the while being protected from the otherwise very aggressive collection methods of those two kinds of creditors.
But Why Not Just File a Chapter 13 Case and Avoid Filing Two Cases?
That’s a very sensible question, and usually that’s exactly what is done. Chapter 13 is quite flexible, and so a single Chapter 13 filing can usually both take care of all of your debts—the conventional one and the unusual ones like taxes and support—in one package.
But there are a variety of situations in which a single filing would not work. Sometimes you have more debt than is allowed for Chapter 13. So you first need to discharge some of the debt through Chapter 7, thereby enabling you to use Chapter 13 to take care of the taxes and such.
Or you may be contemplating or be in a divorce in which you and your spouse agree to file a Chapter 7 case together to clean up many of your debts, then leaving one of you to file the follow-up Chapter 13 case for the taxes, to cure the arrearage on a home, and any other loose ends.
Or as mentioned above, unexpected new debt could hit you during your first case, making you consider a follow-up case to buy you some continued protection.
This discussion should make very obvious that this kind of strategic planning and execution of not just one bankruptcy but two coordinated ones requires the services of a highly qualified and experienced bankruptcy attorney.
Posted by Kevin on March 11, 2015 under Bankruptcy Blog |
You can file a new case 8 years after filing before (so, now or very soon), or possibly only 6 or 4 or 2 years after, or maybe even with no delay.
The Bankruptcy Code underwent major amendments effective October 17, 2005. Nearly two and a half million bankruptcies were filed in the year before that date, by far the most in any year-long period in history.
Today, we focus on the rules relating to the length of time required from a previous bankruptcy filing until a new one.
More precisely the timing rule refers to the amount of time from the filing of a previous bankruptcy case which resulted in the discharge of debts until the filing of another case also resulting in the discharge of debts.
“Discharge” is the legal write-off of debts provided by the bankruptcy law. It’s the main reason—but often not the only reason—for filing bankruptcy.
If you filed a previous personal bankruptcy—whether it was a Chapter 7 “straight” bankruptcy or a Chapter 13 “adjustment of debts” payment plan—and your understanding is that you finished it successfully, almost certainly you received a discharge of your debts. Near the end of your case you should have received a copy of an order from the bankruptcy court granting you a discharge. If you do have your old bankruptcy documents, bring them to your present attorney. If you don’t, he or she should still be able to determine whether or not you received a discharge.
Finding this out is important because, in the unlikely event that you did not get a discharge, then you do not have to wait any period of time before you can file a new bankruptcy case. (The rare exception is if the bankruptcy court entered an order not allowing you to file a bankruptcy for a certain length of time, which only happens after serious abuse of the bankruptcy laws.)
The Timing Rules
Here is how long you must wait in between bankruptcy filings to receive a discharge of debts in a new bankruptcy case.
IF you want to now file a Chapter 7 case:
–and received a discharge in a previous Chapter 7 or Chapter 11 case, you must wait 8 years from the filing date of the previous case to the filing date of the new case;
–and received a discharge in a previous Chapter 13 case, you must wait 6 years from the filing date of the previous case to the filing date of the new case, BUT you don’t have to wait at all if in that Chapter 13 case you paid 100% of the allowed debts, or paid at least 70% and met some other conditions.
IF you want to now file a Chapter 13 case:
–and received a discharge in a previous Chapter 7 or Chapter 11 or Chapter 12 case, you must wait 4 years from the filing date of the previous case to the filing date of the new case;
–and received a discharge in a previous Chapter 13 case, you must wait 2 years from the filing date of the previous case to the filing date of the new case.
IF you want to file a Chapter 11 case, the timing rules are the same as for Chapter 7 above.
(Note that Chapter 11 is usually for a business, or for a huge amount of debt; Chapter 12 is for farmers and fishermen.)
It’s important to understand that the date the discharge was entered in the previous case does not matter. It’s the filing date that starts the clock running here.
So You Can File Soon, or Possibly Now
So, under any combination—7 to 7, 7 to 13, 13 to 7, 13 to 13, 7 to 11 etc., you can file now.
Posted by Kevin on February 12, 2015 under Bankruptcy Blog |
After filing bankruptcy, you hope you never have to do that again. But it’s good to know you can if you need to.
These next two blogs are, first today, an important recent bankruptcy history lesson, and then in the second blog, why this lesson may be quite important to you.
Filing Bankruptcy in Good Economic Times
Eight years ago, in the late winter of 2005, the U.S. economy was relatively robust. The Gross Domestic Product (GDP) had increased in 2004 the most since before 9/11. In fact it would turn out that the GDP increases for 2004 and 2005, at 3.5% and 3.1% respectively, were the best from 2000 through the present.
And yet, more people filed bankruptcy in 2005 than any year in history.
The Bulge in Bankruptcy Filings 8 Years Ago
Here is a table of the total number of bankruptcy filings in the United States for the last 10 years:
| YEAR |
# OF FILINGS |
| 2003 |
1,660,245 |
| 2004 |
1,597,462 |
| 2005 |
2,078,415 |
| 2006 |
617,660 |
| 2007 |
850,912 |
| 2008 |
1,117,771 |
| 2009 |
1,473,675 |
| 2010 |
1,593,081 |
| 2011 |
1,410,653 |
| 2012 |
1,221,091 |
Notice that by far the most bankruptcies were filed in 2005. Not even in the depths of the Great Recession in 2009, 2010, and 2011 were more bankruptcies filed.
The BAPCPA Filing Bulge
The misnamed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) is the reason for this otherwise oddly timed spike in filings. Other “Bankruptcy Reform” Acts had been kicking around Congress since 1997, and one even passed Congress in 2000 but President Clinton refused to sign that one into law. Then every year after that a similar bill was introduced but never passed, until after the 2004 Congressional elections. President Bush was re-elected to his second term and Republicans had won larger majorities in both Houses of Congress. On February 1, 2005 BAPCPA was introduced in Congress, in March the House of Representatives passed it, in April the Senate passed it, and President Bush signed it into law on April 20, 2005, with an effective date of October 17, 2005.
By the time of the results of the November 2004 election, the odds were high that some major “reform” would become law in the upcoming Congress. That became even clearer a few months later in February when the bill was introduced, so the word started going out that people who were considering filing bankruptcy should seriously consider filing before the new law went into effect. Then when the law did pass, with 6 months until its October, 2005 effective date, lots more people got the word and the rush was on to file before that date.
This filing frenzy is shown by the quarterly bankruptcy numbers during this period, with big quarterly increases from the November 2004 election until the October 2005 new law effective date, and the plummeting of filings right after:
| QUARTERS |
# OF FILINGS |
| 4th Q 2004 |
371,668 |
| 1st Q 2005 |
401,149 |
| 2nd Q 2005 |
467,333 |
| 3rd Q 2005 |
542,002 |
| 4th Q 2005 |
667,431 |
| 1st Q 2006 |
116,771 |
Notice how more bankruptcies were filed in just the 4th Quarter of 2005 than in the entire year of 2006. (See the earlier table). In fact, according to the Administrative Office of the U.S. Courts, of the 667,431 bankruptcies filed in that 4th Quarter (October through December), 630,402 were filed in just the month of October. And more than 600,000 of those were filed in just the first 16 days of that October! That means that during those 16 days, the number of bankruptcy cases filed was about the same as during the entire year of 2006!
Why This Recent Bankruptcy History Matters
This history matters if you, or somebody you know, were one of those millions of people who filed bankruptcy in the run-up to BAPCPA, and because of the economic violence of the Great Recession you again need relief.
If you are one of these people, then you need to be aware of two things:
- The BAPCPA “reform” was both as bad and not as bad as feared. It is probably one of the most badly written pieces of Congressional legislation to have made it into law. It is filled with internal inconsistencies, logical conundrums, and unintended consequences. It has created infinite unnecessary headaches for millions of bankruptcy filers during its 7 and half years, as well as at every level of the federal bankruptcy court system all the way up to the U.S. Supreme Court. But partly because of its dreadfully bad drafting, most of the law’s changes have NOT changed the end result for most people needing bankruptcy relief. Most people filing Chapter 7 “straight bankruptcy” can do so, and most of the tools of Chapter 13 “adjustment of debts” are still available for those who need them.
- If you need bankruptcy help again, you very likely either qualify now or will in the next few months. That’s the subject of the next blog.
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 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.
