Posts Tagged ‘Bankruptcy’
Personal Income Taxes in Bankruptcy
June 23rd, 2009 | 
Author: Income taxes present special problems and issues when it comes to bankruptcy. This article brief summary of this complicated rules that govern taxes for those who file bankruptcy.
The Bankruptcy Discharge
In bankruptcy, a “discharge” is the elimination of a debt. The goal of either a chapter 7 or a chapter 13 bankruptcy is obtaining a discharge of your unsecured debts. However, not all unsecured debts are dischargeable. Examples of non-dischargeable debts are student loans, child support and most taxes. However, while most taxes are not dischargeable, in some cases, income taxes are.
Bankruptcy Discharge of Income Taxes
In some instances Bankruptcy can be an effective way of dealing with past due federal and state income tax debt. Under the Bankruptcy Code, whether a tax obligation is dischargeable is determined by when the tax became due. If a bankruptcy debtor owes state or federal income taxes the taxes are dischargeable if the debtor filed their tax return and:
1. 3 Year Rule: The tax return was due more than 3 years prior to the bankruptcy filing. (If the debtor obtained an extension, the due date would be the extension deadline);
and
2. 2 Year Rule: The debtor’s income tax return was actually filed more than 2 years prior to the date the debtor files his bankruptcy;
and
3. 240 Day Rule: The income taxes were assessed by the IRS or Massachusetts DOR more than 240 days prior to the bankruptcy filing;
and
4. The debtor did not file a fraudulent return or willfully attempt to evade paying taxes.
If a Bankruptcy debtor meets all of the above criteria, then their income tax debt is dischargeable. However it is important to remember that these rules only apply to individual income taxes. Moreover, in a Chapter 7 Bankruptcy if the underlying tax obligation is dischargeable, the interest and penalties thereon are also dischargeable. However, if the underlying obligation is non-dischargeable, so are all related interest and penalties.
Tax Lien in a Chapter 7 Bankruptcy
If the IRS of Massachusetts DOR has already recorded a lien on your property, then their debt is secured, and in the case of a Chapter 7 bankruptcy, the tax cannot be discharged; even if a debtor meets all of the conditions listed above. However, that lien can only be assessed against the property that the lien is recorded. For example, if you owe the IRS $10,000.00 in taxes and you meet all of the qualification above, and the IRS records the lien against property that is only worth $5,000.00, after your bankruptcy, the IRS cannot record a lien against any other property that you own. Moreover, once the IRS sells the property that their lien is recorded against, the remaining balance that you owe is discharged.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, a bankruptcy debtor makes payments to a bankruptcy trustee for a period of 3 to 5 years. The trustee in turn pays the debtors creditors according to a repayment schedule, or “Chapter 13 Plan”. Certain debts are paid in full such as mortgage arrears and certain “priority debts” and general unsecured debts (such as credit cards, personal loans and medical bills) are paid with whatever is left over for a fraction of their value.
In a Chapter 13 Bankruptcy, income taxes are treated as priority debts; meaning that they must be paid before any other debts, and like all priority debts, they must be paid in full through the chapter 13 plan. However in order for an income tax to be considered priority the tax must meet only the 3 year rule and the 240 day rule. If the bankruptcy debtor has any tax debts that fall outside these two rules; that debt is considered a general unsecured debt and the tax debt will be treated the same as the debtor’s other unsecured debts during the repayment period. However, the tax debt will not be discharged. If the bankruptcy debtor does not satisfy these two rules, then the tax debt is considered a priority debt and it must be repaid in full through the Chapter 13 Plan. If the debtor cannot repay 100% of their priority debt through the Chapter 13 bankruptcy, they will have to convert their debt to a Chapter 7 bankruptcy.
Another important consideration for chapter 13 debtors is the accrual of penalties and interest. The filing of a chapter 13 bankruptcy stops the IRS and the Massachusetts DOR from assessing additional penalties and stops the accrual of interest.
Tax Lines in a Chapter 13 Bankruptcy
Another consideration in a chapter 13 is a tax lien. If the IRS of Massachusetts DOR has recorded a tax lien against a debtor’s property for unpaid income taxes, that debt becomes secured debt and cannot be discharged; even if the tax would have qualified for discharge under the 2 year and 240 day rules. However, if the amount of the lien exceeds the value of the property which the lien is attached, a debtor may seek relief from the Bankruptcy Judge and have the portion of the lien that exceeds the value of the property striped; something known as a “cram down”. The portion of the lien that is stripped then becomes unsecured.
Conclusion
The Bankruptcy rules are complex when it comes to dealing with income taxes and tax issues should not be handled by a pro-se bankruptcy filer or even an inexperienced bankruptcy attorney. If you have personal income tax issues you should consult with a Boston Bankruptcy Lawyer who is familiar with the bankruptcy rules regarding taxes and the many exceptions.
Posted in Taxes | 
Tags: Bankruptcy, chapter 13, discharge, income taxes, irs, Massachusetts Bankruptcy lawyer | 
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The Truth about Debt Consolidation and Debt Settlement Companies
Today I read an interesting article by a self proclaimed “financial expert” who has made himself rich by selling books and advice to people who are in debt. I will avoid using his name; but truth is there are quite a few “experts” like him on the internet; just look for the paid ads in Google that say “Avoid Bankruptcy”, “Bankruptcy Alternatives”. In his article, he states that even if he sees a situation where there is “no way out” that he would try to talk the person out of filing bankruptcy. His article was rattled with lies; such as “bankruptcy stays with you forever” and half truths such comparing bankruptcy to the death of a loved one. However, as I read on, one thing became clear; this expert was using a time tested marketing technique called fear. He was attempting to scare people into buying his product…a subscription to his website, or one of his many books.
This gets me to the point of this post: as financial times get tough, there are more and more unscrupulous companies out there that target and take advantage of people who are going through financial troubles…so be careful. Most people that consult with me have been programmed to believe that they should avoid bankruptcy at all cost and they have this huge social stigma against the bankruptcy; to the point that they are on the verge of becoming homeless. It is this “stigma” that has lead to more and more predators appearing on the internet, in the news paper or on the radio. These companies all have a common theme; they claim “reduce your debt by 60% or more” or that can negotiate a lower payment. I recently saw one site that promised to have you “out of debt in 18 months”. If this sounds too good to be true, well it is. Most people who use one of these services end up filing bankruptcy anyway after they have paid thousands of dollars to these companies while nothing is ever paid to their creditors.
Let me explain how most of these companies work. First is the payment reduction method, or debt consolidation. Through this method, the company sends a letter to your creditors asking for lower payments. They also ask that your creditor pay them a certain percentage of the loan, and may have you pay a fee also. You pay the consolidation company and they pay your creditors. Your creditor may participate in this program, but most don’t. This means that you end up paying the consolidation company for a few of your debts and paying your actual creditor for the rest.
The second method usually used by these companies is the debt settlement approach. Under this approach, the company will have you start making payments to them instead of your creditors. They tell you to stop paying your creditors, and some even say that they have already made arrangements with your creditors. These companies first collect their fees (most of the time several thousand dollars), then put the rest in a bank account. They then wait until your creditor defaults you for not making payments then they propose a “lump sum” payment in full that is a fraction of the outstanding debt.
Don’t get me wrong, debt consolidation and debt settlement do work for a relatively few people; I have done them myself for my clients. So my suggestion, before you waste your money on one of these companies, schedule an appointment with a good bankruptcy lawyer, most consultations are free. Ask your attorney questions about alternatives to bankruptcy and if he insists that bankruptcy is your best option, ask him to explain why. If he gets upset or short, or cannot answer your question, then end the consultation and call another attorney. Because the truth is; bankruptcy is not for everyone and a good attorney will tell you so.
Posted in Bankruptcy Alternatives |
Tags: Bankruptcy, debt consolidation, debt settlement |
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The Pitfalls of Mortgage Remodification: A Chapter 13 Client's Story
I had something interesting happen today. I have a client who is in a Chapter 13 Bankruptcy and had told me that he was only behind on his mortgage payments by 3 months. This was not a big problem. However, when the mortgage company filed a proof of claim (a document that a creditor files with the Bankruptcy Court to inform the court how much is owed on a debt) the mortgage company claimed that my client was 15 months behind on their mortgage payments.
After talking to my client, he disclosed that he fell behind on his mortgage payments he contacted his mortgage company when he fell behind 3 payments and asked for a loan modification. His lender told him not to make any payments, because they would not accept them. This went on for 12 months. So, in our clients mind, he was only 3 months behind on his mortgage payments, although he did not make a payment for 15 months….ouch. So, now it looks like the amount of the arrears is so large that it cannot be repaid through a Chapter 13 Bankruptcy plan. This means that I may not be able to save his house.
So, this leads me to my point. If you are having problems with your mortgage, don’t delay; talk to a bankruptcy attorney as soon as possible. Keep making your mortgage payments, even if you are behind. If your lender returns the payment, deposit it into a savings account…do not spend it. Then, pick up the telephone and call a bankruptcy lawyer. A good lawyer will tell you if you are a good candidate for bankruptcy or if there are other options available to you.
Next, do not think that your mortgage lender will look out for your best interest. Remember, your mortgage company is in business for one purpose; to make money for its shareholders. No matter how bad your situation, (family death, illness, etc.) your creditors are only concerned about making money. Maybe the government will come through and bail you out; but don’t count on it. Ultimately, you are the only person who has to power to control your future. Don’t be afraid to use all the tools you have available.
Posted in Mortgages |
Tags: Bankruptcy, bankruptcy attorney, chapter 13, mortgage modfication |
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