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 August 11, 2015 under Bankruptcy Blog |
The IRS is just another creditor that you can get immediate protection from by filing bankruptcy. With some exceptions.
The “Automatic Stay”
The filing of a bankruptcy case—either Chapter 7 or 13—triggers one of the most powerful tools of bankruptcy—the “automatic stay.” That’s the aggressively protective law that goes into effect 1) automatically the instant your bankruptcy case is filed at court 2) to stay—which means stop—all collection activity against you and against any of your assets.
The Bankruptcy Code includes a list of what creditors cannot do because of the “automatic stay.” Here are some of them (focusing on those readily applicable to the IRS):
- start or continue a lawsuit or administrative proceeding to recover a debt you owe
- take possession or exercise control over property you own as of the time your bankruptcy is filed
- create or enforce a lien against such property
- collect by any means any debt that existed before the bankruptcy filing
Applied to the IRS
The IRS and similar state agencies are certainly not treated like your conventional creditors when it comes to the discharge (legal write-off) of your debts. But in most respects they ARE treated the same for purposes of the “automatic stay.”
The Bankruptcy Code says that the “automatic stay” “operates as a stay, applicable to all entities.” (11 U.S.C. Section 362 (a).) Is the IRS an “entity”? The Code explicitly defines that term to include “governmental unit.” (Section 101(15).) So the IRS and all tax collecting “governmental units” are governed by the “automatic stay.”
What If the IRS Still Tries to Collect
Just like any other creditor, the IRS can get slapped pretty hard if it violates the “automatic stay” by continuing to collect on a debt or taking any other of the forbidden actions. If you are
“injured by any willful violation of [the automatic] stay… [you] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages” against the IRS. (Section 362(k).) Indeed on occasion the IRS HAS been slapped hard. It now tends to follow the law and respect the “automatic stay” quite faithfully.
Special Exceptions to the “Automatic Stay” for “Governmental Units”
The IRS and state tax agencies do have some specialized exceptions—things they can continue doing in spite of your bankruptcy filing. (Section 362(b)(9).) But these are sensible exceptions that apply more to the determination of amount of a tax debt than to its actual collection. These tax agencies can demand that you file your tax returns, can make an assessment of the tax and tell you how much you owe, and can do an audit to figure out the amount you owe. They cannot create a tax lien or take any other collection action.
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 30, 2015 under Bankruptcy Blog |
If you can’t discharge your income tax debt through Chapter 7, or make workable payment arrangements on the remaining tax debt, then Chapter 13 can be a good solution.
The Previous Chapter 7 Options
A consistent theme through these past blogs has been that in many situations you do not need to incur the extra expense and time of going through a three-to-five-year Chapter 13 case when other solutions will work. But Chapter 13 IS often an excellent mechanism for resolving all your income tax debts (and usually all your other debts, too).
Chapter 13 Can Be the Easiest Way to Address Your Income Tax Debts
A Chapter 13 payment plan is often a significantly easier way to deal with income tax debts than the other alternatives because:
1. The payment amount going to the taxes are often more reasonable than the IRS/state would require. That’s because they are based on what you can actually afford, by allowing you more reasonable amounts for your expenses.
2. Your Chapter 13 case incorporates ALL your debts in one package, so that you are not forced to satisfy the IRS/state to the exclusion of other important creditors (such as your mortgage, vehicle payments, and child/spousal support). The taxes may have to wait their turn to be paid after debts that are a higher priority for you, instead of just getting paid first.
3. Putting all your debts into one Chapter 13 package also includes all categories of your income taxes—particularly those that are being discharged and those that aren’t. This avoids the situation under Chapter 7 in which you discharge some of the taxes but then have to deal directly with the IRS/state for the taxes that were not discharged.
4. The payments going to the IRS/state can be adjusted during the course of the Chapter 13 if your circumstances change, usually without much room for their objection.
Chapter 13 Can Be a Cheaper Way to Pay Non-Discharged Taxes
It can be cheaper because:
1. In contrast to the other scenarios, under Chapter 13 usually no more interest and penalties can be added after the case is filed.
2. Often you don’t have to pay even the previously accrued penalties.
3. If you have a tax lien attached to any of your tax debts, the lien can sometimes be paid off more cheaply by paying the secured value of the lien instead of the full tax.
If your tax debt is high, and you are paying into your plan for the full five years, these savings can amount to many thousands of dollars.
Chapter 13 Is a Safer Way to Pay Non-Discharged Taxes
It’s safer because:
1. Instead of being at the mercy of the IRS/state if you are not able to make a payment, under Chapter 13 your “automatic stay” protection from all your creditors—including tax creditors—persists throughout your case. So you are not a hair-trigger away from being hit with tax liens, or levies on your wage and bank accounts.
2. You CAN lose this protection, but if you and your attorney deal with your situation proactively you can usually preserve it.
3. This protection is particularly important when your circumstances change—instead of being at the mercy of the IRS/state, your attorney can make adjustments to your Chapter 13 plan. Or if necessary, even more aggressive or creative steps may be appropriate, such as changing to a new bankruptcy case. The point is that you usually have much more control over the situation.
Posted by Kevin on May 12, 2015 under Bankruptcy Blog |
Just when you think, as a debtor’s attorney, you have Chapter 7 and Chapter 7 trustees figured out, the system and creative trustees throw you a curve ball.
A majority of my middle class to upper middle class debtors file because at least one spouse lost a high paying job. Unfortunately, just because you lost your job does not excuse you from paying your financial obligations. One of those obligations, at least in the mind of most husband and wife debtors, is the college tuition that they paid on behalf of their children. When I ask my clients to put together a budget, many still list the college tuition payment that they could afford a year or two ago but not now. Of course, that leaves nothing for creditors, but, as my clients protest, they have an obligation to their children.
I have had many a discussion with parents who think they belong in Chapter 7 because they are budgeting $1000 or more per month for tuition, when the reality is that the trustee will never allow such a payment, and will probably force that debtor into a Chapter 13. What the debtor /parent cannot understand is that in the eyes of the bankruptcy trustee, the obligation to pay college tuition belongs to the son or daughter and not the parent. While the parent looks at their child as a child, the trustee looks at them as a full grown adult because they are 18- capable of paying their own way.
Well, for those parents/debtors, some trustees around the country are adding insult to injury. Not only are they prohibiting college tuition as an expense on the means test or Schedule J, they are threatening colleges and universities with actions to claw back tuition paid up to four years before the filing on the grounds that it is a fraudulent conveyance. Now, we usually think of a fraudulent conveyance in terms of the debtor tries to screw his creditors by conveying his second home to his brother prior to filing.
As I stated above, many parents believe that it is their obligation to pay their children’s tuition. But, trustees have been pointing out that it is the student, and not the parents, who gets the benefit of college. The quid pro quo for that benefit is payment of tuition. Therefore, tuition is the obligation of the student and not the parent. By paying the child’s tuition, the argument goes, it is just the same as deeding your home to a relative- your creditors do not get the benefit of that payment, and you, the debtor, are paying the obligation owed by a third party.
So, trustees are going after the colleges who, in more cases than not, are making deals and paying back some or all of the tuition to the trustee. The colleges, in turn, are trying to squeeze the student to recoup the money. Part of the squeeze on the student is to withhold diplomas or transcripts. Of course, if the student is out of school for a few years, that type of leverage cannot work.
We are talking tuition here and not student loans. Parents can be on the hook for Plus loans. Most student loans are not dischargeable in bankruptcy.
The Wall Street Journal had a big article on this topic last week. I have seen other articles on this issue over the last 6 months. So do not be surprised if this issue comes up more and more in consumer bankruptcies.
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 December 27, 2014 under Bankruptcy Blog |
It’s human nature to hold off filing bankruptcy until after the holidays. Here’s what you need to know once you think again about filing.
The Quietest Time of the Year
For most bankruptcy attorneys December is the quietest time of the year. Because:
- people understandably want to focus on family and friends, instead of on their financial troubles;
- the materialism of the season discourages people from taking a realistic view of their finances;
- many mortgage companies ease off on foreclosures, and other creditors and collection agencies back off their collections, during this season, to avoid looking like Scrooges;
- people don’t have time to see an attorney—especially about bankruptcy–with everything they have to get done for the holidays; and
- no one has the emotional space to go talk with an attorney about messy personal finances during this already emotionally taxing time of the year.
Things to Keep in Mind Starting December 26
After getting through the holidays, and with the time for New Year’s resolutions approaching, one of your likely resolutions is to defeat your debts once and for all. If you are considering bankruptcy as one possible way to meet that resolution, be aware of the following after-Christmas, turn-of-the-year issues:
- Some debts ( cash advances on your credit card or purchase of luxury items) you rang up during the few months before filing bankruptcy—to buy holiday gifts or pay for holiday expenses, for example–might not be discharged (legally erased). That depends on some nitty-gritty details of your use of credit, as well as your intentions at the time.
- If you are going to owe income taxes for the 2014 tax year and expect to be filing your bankruptcy case soon after the turn of the year, that 2014 tax debt presents both some challenges and opportunities. Oddly, sometimes that debt can be paid in effect without costing you anything.
- A holiday bonus from your employer or a cash gift from a well-meaning relative can increase your “income” for purposes of the “means test,” either making qualifying for Chapter 7 more difficult or potentially turning your 3-year Chapter 13 case into a 5-year one. These major financial disadvantages can often be avoided through smart timing.
If you understand how bankruptcy works, these potentially troublesome issues can be turned to your advantage. The next blogs will show you how.
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 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 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 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 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 6, 2014 under Bankruptcy Blog |
Filing bankruptcy with or without your spouse affects the discharge of debts you each receive, and also affects whether you file under Chapter 7 or 13.
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Continuing from the last blog:
- There are consequences to filing separately or together, consequences affecting:
- the discharge of your debts.
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The last blog was about what happens to a spouse who doesn’t file bankruptcy when the other spouse does, specifically as to the “automatic stay,” the immediate protection from creditor collection activity. In a nutshell, there is NO protection from joint creditors for the non-filing spouse in Chapter 7, while there IS some important but limited protection in Chapter 13 through the “co-debtor stay.”
The “automatic stay” is temporary protection that goes into effect at the beginning of and can last the length of the case. The “discharge”—the permanent legal write-off of a debt which is the topic of today’s blog—happens at the end of either a Chapter 7 or Chapter 13 case.
Debts Are Individual
A debt is an individual liability. Discharging a debt in bankruptcy is not so much a destruction of that debt as a legal pronouncement that an individual is no longer liable on that debt.
Each person owes a debt individually—we are not automatically liable for our spouse’s debts. So if ALL of a couple’s debts are owed by one spouse and only that spouse, then a bankruptcy by that spouse will leave the couple with no debts (assuming the debts are of the kind that can be discharged).
Chapter 7 Discharges Debts Only of the Filing Spouse(s)
Much more common is the situation in which two spouses each have some individual debts and some joint debts.
If they file a JOINT Chapter 7 straight bankruptcy, at the completion of the case their debts will be discharged (legally written off). That includes debts that each spouse owes individually, as well as those for which they are both legally liable.
If only ONE of two spouses files a Chapter 7 case, only that spouse’s debts will be discharged. That includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse. But the non-filing spouse’s debts will not be discharged. And that includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse.
Distinguishing Individual and Joint Debts
What this means is that one spouse should not file without the other unless they know exactly how much debt the non-filing spouse is legally liable for—both his or her separate debt and their joint debt.
This is not always obvious. A seemingly non-liable spouse can in fact be legally liable on a debt in numerous possible ways. A creditor’s monthly bill that is addressed to only one spouse does not necessarily mean that the other spouse did not sign and become obligated under the original loan agreement. Under certain states’ laws a spouse is obligated for the other spouse’s debts under certain circumstances. Also, specific creditors—such as the IRS—are favored with special laws creating liability for the other spouse. So both spouses’ debts need to be reviewed carefully to see who is liable on each contractually and as a matter of law.
There’s No “Co-Debtor Discharge” in Chapter 13
There is no discharge of a non-filing spouse’s liability analogous to the special “co-debtor stay” of Chapter 13. The filing spouse has the opportunity to protect the non-filing spouse during the course of the 3-to-5-year Chapter 13 case through the “co-debtor stay,” but if the debt is not paid in full during the case then the creditor can pursue the non-filing spouse once the case is over. That’s true even though the filing spouse’s liability for the same debt is discharged at the end of that Chapter 13 case.
Take as an example a husband and wife owing $5,000 on a credit card that they both thought only the husband was liable on because they understood it was tied to his business that failed. They’d forgotten that long ago they had both signed the credit card application. If only the husband files a Chapter 13 case, the “co-debtor stay” would immediately prevent the credit card creditor from pursuing the wife. That creditor may not bother to object to the “co-debtor stay.” Then at the end of the husband’s Chapter 13 case, any of his remaining liability on that credit card debt (beyond whatever portion was paid through his plan, if any) would be discharged, and his case completed and closed. That would terminate the “co-debtor stay,” allowing the creditor to pursue the wife for the full $5,000 debt (less any payments made in the Chapter 13 plan), plus years of interest and late charges.
The Bottom Line
Be very cautious about filing a separate bankruptcy case—Chapter 7 or 13—without your spouse. Discuss your debts thoroughly with your attorney, getting strong verification that the non-filing spouse is liable neither contractually nor by operation of law on debts. Use the “co-debtor stay” to protect the non-filing spouse on a limited joint debt(s), but only to give the filing spouse time to pay off the debt(s) in full so that there is no surviving liability at the end of the Chapter 13 case for which the non-filing spouse would continue to be liable.
Posted by Kevin on September 28, 2013 under Bankruptcy Blog |
If you were already on the financial edge and just found out you owe a bunch of income taxes, here is how bankruptcy can help.
If you owed nobody but the IRS for last year’s income taxes, you wouldn’t likely need to think about filing any kind of bankruptcy. In many circumstances, the IRS is actually reasonably decent to work with, such as in setting up a monthly payment plan for catching up on a single year’s tax shortfall. Sure, you’ll pay some penalties and interest, but if you can pay it all off in reasonable monthly payments in the next year or so, that wouldn’t be such a bad thing.
But if you owe for more than one year, or are just filing for the 2012 tax year on extension, and still owe for 2013, then it looks like you’re getting into a vicious cycle. And if on top of that, you have a whole bunch of other debts, you owe it to yourself to check out Chapter 7 and Chapter 13 as possible ways out of that vicious cycle. Today we’ll briefly explore how Chapter 7 helps, and then how Chapter 13 does in the next blog.
Chapter 7 and Income Taxes
You may well have other reasons for choosing to file a Chapter 7 instead of a Chapter 13, but the rule of thumb as far as taxes is pretty simple, especially if the only taxes you owe are from the last year or two:
File a Chapter 7 case if after doing so you will be able to get caught up on your back and current taxes through manageable monthly payments made over a reasonable period of time. In other words, file a Chapter 7 if you don’t need the extra protection and benefits provided by Chapter 13.
Both Chapter 7 and 13 can legally write off (“discharge”) income taxes, but can never do so until at least three years from the time the tax returns for those years were due to be filed (including extensions, if any). So as of now you could discharge 2008 income taxes, and 2009 taxes that were filed on April 15. but not later ones. That’s because 2008 taxes were due either April 15, 2009 or October 15, 2009 depending on whether you got an extension, and you could discharge a 2008 tax debt starting three years later, after April 15, 2012 or after October 15, 2012. You could discharge the 2009 tax debt if you filed on April 15, 2010. If you filed your tax return on October 15, 2010, you could not discharge the tax obligation if you filed Chapter 7 today (but you may be able to discharge if you held off your bankrutpcy filing to after October 15, 2013). You’d have to meet some additional conditions as well, but this three-year condition is a good starting point.
So unless you currently owe income taxes going back further than 2009, Chapter 7 is not going to discharge any of them. That does not mean that Chapter 7 is without benefit, though. The benefit it will give you is discharging all or most of your other debts. So the analysis we will go through with you when you meet with us involves two questions:
1) How much will filing Chapter 7 improve your monthly cash flow? In other words, how much will you be able to pay to the IRS realistically on a monthly basis, both to catch up on the back taxes and to make any necessary adjustments to the current withholdings or estimated quarterly payments?
2) How much do you owe in back taxes? Will the amount that you can realistically afford to pay each month enable you to get current in a reasonable time (so you’re doing so within the length of time the IRS will allow, and without incurring a crippling amount in additional penalties and interest)?
Unless we confidently believe that Chapter 7 will solve your tax problem, we’ll look at whether Chapter 13 would do better. It’s wise to consider Chapter 13 regardless, so you’ll know the advantages and disadvantages of both options. See the next blog for that.
Posted by Kevin on September 22, 2013 under Bankruptcy Blog |
If you need bankruptcy protection but already filed a bankruptcy case within the last few years, you may still be able to file a new one now.
There are some strict rules about when you can file a bankruptcy case after having filed a previous one. But as with so many other areas of law, there are opportunities when we look more closely.
Previous Bankruptcy Filing vs. Discharge
It’s not necessarily previously FILED bankruptcy cases that count, but only ones in which you received a DISCHARGE of your debts. All the timing rules in the Bankruptcy Code dealing with when you can file a new case refer to the length of time since “the debtor has been granted a discharge” or “has received a discharge” in the previous bankruptcy case.
In other words, if your previous case was not successfully completed—it was dismissed before you finished it—that case would not prevent you from filing a case now, no matter how long or short of a time since that previous case was filed.
So make sure—absolutely sure—that you got a discharge in your earlier bankruptcy case. If you distinctly remember that your case finished the way it was supposed to, you very likely DID get a discharge. But you definitely want to make sure. Find out from your former attorney. Or dig up the discharge order issued by the Bankruptcy Court from your old paperwork, or we can likely find out for you when you come in for your initial consultation.
The Timing Rules
If you’ve heard that you have to wait 8 years between bankruptcy filings, be aware that only applies to one of a number of possible scenarios: the length of time from the previous discharged Chapter 7 case to the filing of a new Chapter 7 case.
If your previous case was a Chapter 7 one and you now want to file a Chapter 13 case, the applicable length of time is only 4 years.
If your previous case was a Chapter 13 one and you now want to file a Chapter 7 case, the length of time is only 6 years. And in fact if that previous Chapter 13 case was one in which your unsecured creditors were paid at least 70% of their debts, then there is NO limitation on filing a Chapter 7 case afterwards.
And if your previous case was a Chapter 13 one and you now want to file a Chapter 13 case, the applicable length of time is only 2 years.
And very important: on all of these the clock starts running NOT at the time of discharge—generally at the end of a case—but rather earlier, at the date of filing at the very beginning of the prior case. So what count is the date of filing of the prior case to the date of filing the new case. For example, if your previous case was a Chapter 13 one that was filed on October 1, 2006, and it took five years to complete so that the discharge was entered on October 1, 2011, you would be able to file a Chapter 7 case starting October 1, 2012.
Why File a Bankruptcy Case If You Can’t Get a Discharge?
So if you need bankruptcy protection but not enough time has passed, you can still file the case but you just won’t receive a discharge of your debts. Why would you ever want to do that?
Probably never for a Chapter 7 case, since almost always the main benefit of a Chapter 7 case is the discharge of your debts.
But Chapter 13 provides a number of other benefits distinct from the discharge of debts. For example, it stops a foreclosure and gives you years to catch up on your mortgage arrears. It also stops extremely aggressive collection of unpaid support payments, including the suspension of professional/occupational/driver’s licenses, again giving you years to bring it current. It may be able to significantly reduce what you pay for your vehicle through a “cram down.” For these and other reasons it can make a lot of sense to file a Chapter 13 case while knowing that you’ll not get a discharge of any of your debts. You may not even have any debts to discharge, but just need one or more of those other powerful benefits.
In fact that’s usually the situation with the so-called “Chapter 20.” This usually involves, first, the filing of a Chapter 7 case, which results in the discharge of most of the debtor’s debts. Then, second, immediately after that’s done, a Chapter 13 is filed to use one or more of its benefits. (Chapter 7 + 13 = 20.) Since most of the debts were discharged in the prior Chapter 7, the debtor doesn’t need a discharge in the Chapter 13 case.
This blog should make it clear that a simple rule—8 years from one bankruptcy to the next one—is often woefully incomplete and misleading. In addition, there are complicated rules concerning whether the automatic stay will apply in case involving multiple filings. This is another good argument that you truly need to talk with an attorney who focuses on bankruptcy instead of making misassumptions that could cause you lots of unnecessary grief.
Posted by Kevin on under Bankruptcy Blog |
If you and someone else jointly owe a debt, bankruptcy can protect you against the debt and against your co-signer. Or if you want, bankruptcy can instead protect your co-signer.
Let’s look at two essentially opposite scenarios involving you and your co-signer getting sued on a debt you both owe:
1) You’ve had a falling out with the co-signer, and all you care about is escaping the debt; or
2) You believe you have a moral duty to protect the co-signer, so that is your highest priority.
We’re going to address the first scenario today, and then the second one in the next blog.
Protecting Yourself…
If you and your co-signer are being pursued by your creditor, and you cannot and will not pay the debt, you have two distinct obligations to worry about—a definite one to the creditor and a likely one to the co-signer.
… from the Creditor Itself
The obligation to the creditor is based on your promise to pay the debt. Most likely that obligation can be discharged (legally written off) by filing bankruptcy.
Like any other creditor, this one could object to the discharge on grounds of your fraud or misrepresentation, but those objections are rare.
You could discharge this debt through either Chapter 7 or Chapter 13, depending on whichever is in your best interest otherwise. Chapter 13 happens to come with the “co-debtor stay,” some extra protection for your co-signer which will be discussed in the next blog, because here we are assuming you don’t care about protecting the co-signer.
… from the Co-Signer
You very likely have a closely related but still distinct obligation to your co-signer, one that is likely less clear than the one you owe directly to the creditor. This obligation to the co-signer is indirect, likely only to arise if your co-signer pays all or part of your debt to the creditor. Even then you may or may not have a legal obligation to the co-signer. There is a good chance that you and the co-signer did not write out the terms of your obligation. So your obligation to the co-signer could be merely inferred, based on an unspoken assumption that you would make the co-signer whole if you ever failed to pay the debt and the co-signer paid the creditor all or part of it. But there could also be a sensible inference—depending on the facts of the case—that the co-signer did not expect you to pay it in that situation. So you could possibly defend against that liability.
But practically speaking, the creditor is going to pursue both you and your co-signer. If you can’t pay the creditor who you clearly owe, there may well not be much point in putting a lot of time and expense into defending against a legal obligation to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.
If you do file bankruptcy, be sure to list among your creditors not just the direct creditor but also your co-signer. Otherwise you could remain liable to the co-signer after your bankruptcy case is finished.
As with your direct creditor, your co-signer could object to the discharge of his or her claim against you, based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. Although these objections are rare, they ARE more often raised by former friends, ex-spouses, ex-business partners. Why? Because 1) they have a personal axe to grind, 2) misunderstanding tend to arise more in informal arrangements, and 3) these kind of folks may know more damaging information about you than would a conventional creditor.
The best way to protect yourself from such challenges is to explain the situation thoroughly to your attorney when you first meet. That way your bankruptcy documents can be prepared in a proactive way, and you’ll avoid being blindsided.
Posted by Kevin on April 22, 2013 under Bankruptcy Blog |
Most creditors don’t challenge your write-off of their debts in bankruptcy. But if one does, the system is poised to resolve that challenge relatively quickly.
The last blog, and this one, are about what happens when a creditor raises one of the few available arguments to try to prevent its debt from being legally discharged. As emphasized last time:
- Most potentially dischargeable debts DO in fact get discharged. To avoid any particular debt from being discharged, the creditor has the burden of establishing that the debt arose out of a very specific sort of bad behavior by you, one that is on a list that is in Section 523 of the Bankruptcy Code.
- Your creditors have a very firm deadline to raise such a challenge, or else lose the ability ever to do so.
- The challenge is raised by filing a complaint . This starts an “adversary proceeding,” a lawsuit focused only on this question.
Avoid Losing by Default
After a creditor files a complaint, the most important thing to realize is that the creditor will automatically win if you and your attorney do not file a formal answer at the court within the stated deadline. So contact your attorney immediately if you receive a complaint.
Most Discharge Challenges Don’t Go to Trial
The adversary proceeding can go through all the steps of a regular lawsuit. After filing the answer, there can be “discovery”—the process of requesting and exchanging any pertinent information and documents, and holding depositions (questioning witnesses under oath). And there could be various kinds of motions, pre-trial hearings, and a full trial. But these kinds of adversary proceedings rarely go through all these step and get to trial, because the amount of money at issue usually does not justify the cost involved for either side to pursue it that far. So after both sides get a clear picture of the facts, there is usually a settlement. Or the debtor does some quick math, and decides that it would be cheaper to buy off a creditor than to spend the money on additional legal fees with the possibility that you could lose at trial and be forced to pay the creditor the full amount due (note that representation in an adversary proceeding is never included in the base fee).
But if there is enough at stake, or else if one or both sides are unreasonable and insist on getting a decision from the judge, the dispute does go to trial. These trials usually last a half-day, or a day, very seldom longer. At the end of trial the bankruptcy judge decides whether the debt is discharged or not. Extremely rarely, this decision can be appealed, in fact theoretically all the way up to the United States Supreme Court!
What’s So Quick and Efficient about All This?
Any litigation is very expensive, so you hope to avoid any discharge challenges. But bankruptcy court is a relatively fast and efficient forum for a number of reasons:
1) Because creditors have the opportunity to review your finances beforehand, much of the time they will not bother to raise challenges at all.
2) If a creditor does raise a challenge, the issues are narrow and so the fight is usually focused on just a few critical facts.
3) Adversary proceedings move along fairly quickly. Compared to most state court and regular federal court litigation which often takes a couple of years, these kinds of adversary proceedings tend to be resolved in a matter of few months.
4) Because bankruptcy judges deal with these kinds of challenges all the time, they are extremely familiar with these legal issues. So they move these cases fast.
Having a creditor object to the discharge of a debt can significantly complicate a Chapter 7 or Chapter 13 bankruptcy case. But these disputes are usually settled relatively quickly. Help this happen by informing your attorney about any threats made by creditors before your bankruptcy is filed, and then working closely with your attorney if a creditor follows through on its threat by filing a complaint.
