Monthly Archives: February 2015

Your Bankruptcy Trustee Can Pay Your Taxes For You

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Occasionally, I run into a situation where a client needs to file for bankruptcy, maybe even needs to file NOW; but – they have non-exempt assets. Now, in Oklahoma we have pretty generous exemptions, and most people who file for Bankruptcy lose nothing but a bunch of debt. Occasionally, though, I run into someone with mineral interests, a significant amount of jewelry (our wearing apparel exemption is generous, but a $35,000 ring that isn’t your wedding or engagement ring is going to be a problem); and they still need to file. This is a problem.

Usually, given a little time we can find a solution that the client is happy with. This is what is called pre-bankruptcy planning, and it is tricky. There are plenty of things that you can do with an asset right before a bankruptcy filing that your Trustee can just undo. There are other things you can do that will get you into real trouble – losing your discharge, going to jail. This is not an area to mess around with if you don’t know what you are doing. Still, generally, given time, there are things that can be done to protect a non-exempt asset.

So, what happens when you don’t have time? Sometimes you need to file NOW. In those cases you file the case knowing that the Trustee is going to administer whatever the asset is. Several years ago, I filed a Chapter 7, and first thing the next morning was emailing the freshly appointed Trustee (who didn’t even know she was the trustee yet) wanting to know when would be convenient for my client to deliver approximately $50,000 in jewelry to her office. She was a little taken aback. In this particular case the client didn’t want the jewelry and had made some efforts to sell it but had not been successful.

Consequently, he was thrilled when I asked him if he would like to have the Trustee pay his taxes with the proceeds from the jewelry he didn’t want and hadn’t been able to sell.

Here is the scoop. We filed for what is called a short tax year. It is perfectly legitimate, although it is very rarely done. Basically, my client filed two tax returns for the year in which he filed for Bankruptcy. He filed one return for the calendar year up to the day he filed for bankruptcy, and he filed a second return for the remainder of the calendar year. We did this, because he had made no estimated quarterly payments prior to filing for bankruptcy; and his income for that period had been substantial.

By doing this we converted his tax liability for that first, short-year, return into a liability of his Bankruptcy estate that was entitled to priority – meaning it got paid first. He still had to pay the tax liability for the rest of the year, but that was only about a quarter of the year’s total tax liability. So, he got his Bankruptcy Trustee to liquidate stuff he didn’t want and use the proceeds to pay three quarters of his taxes for the year. Now, that is pretty sweet.

Elaine

What If I Didn’t List Something. . . .

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First of all, there is a huge difference between failing to list an asset, like that mineral interest you inherited from your Grandparents, and failing to list a debt, like a car loan. Either one is perjury, if the omission was intentional; and either one can be grounds for a finding of bankruptcy fraud or even a denial of discharge if the facts are right. So, you really do need to put some time and effort into making sure that your Schedules include all of your assets and all of your debts.

So, what happens if you missed something? Assets are a whole different issue, I will touch on another time. Let’s talk about not listing a debt. It can be easy to forget an old medical bill or there can be debts you don’t even know about. Let’s say you had a car repossessed a few months before the bankruptcy filing. You scheduled the repossession on your Statement of Financial Affairs, but you didn’t list the Creditor; because you didn’t realize that you were still going to owe them money.

The creditor doesn’t get notice of the bankruptcy, and a year or two later the creditor sues you for the difference between what you owed at the time the car was repossessed and the amount they got for the car (after subtracting repo fees, sale fees, reconditioning fees, etc, etc., etc.). So, a year or two after your bankruptcy you are being sued for thousands of dollars. Now what?

That depends. The first issue is which chapter you filed under. This assumes that you filed a Chapter 7 bankruptcy. The analysis for a Chapter 13 is quite different. The second issue is whether or not your Bankruptcy was an asset case or a no-asset case. In other words, whether or not your Trustee managed to distribute any money out to your creditors. Most Chapter 7 Bankruptcies are no-asset cases. The biggest variable, believe it or not, is where you filed your Bankruptcy.

If you filed your Chapter 7 Bankruptcy in Oklahoma (and this blog is always restricted to Oklahoma issues, since that is the only State in which I am licensed to practice), and it was a no-asset case; you’re almost home free. As long as the failure to list the debt was truly unintentional and in good faith, your liability for that debt was included in your discharge. That does not mean, however, that you can sit back and do nothing. The creditor has incurred collection costs as the result of your failure to give them notice. So, you need to take action ASAP to let them know about the Bankruptcy. The best way to do this is to contact your Bankruptcy attorney and have them send a letter to the creditor’s collection attorney explaining the facts, providing information about the bankruptcy filing and providing information on the law in Oklahoma as to the inclusion of omitted debts in a no-asset discharge. You can expect to pay for that service, but in my opinion it is money well spent. The last thing that you want to do is wind up facing a wage garnishment that could have been avoided or find that you may have waived some rights by allowing the creditor to continue acting out of ignorance of your bankruptcy filing. Remember, you have a duty to give notice of the bankruptcy filing to everyone you owe money to. Failing to do so does not necessarily leave you at the creditor’s mercy; but that does not mean it is completely without ramifications.

Elaine

Loan Delinquencies — Times Are Changing

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I was just reading an article about loan delinquencies.  These are national numbers released by the New York Federal Reserve.  Delinquency rates are loans that are at least 90 days past due, and the real surprise to me was the rate for student loans.

Nationally, 3.1% of mortgage loans are delinquent;

3.5% of auto loans are delinquent; and

11.3% of student loans are delinquent.

Really?  More than 1 in ten student loans is at least 90 days past due?  Washington, I think we have a problem.

Elaine

What If the Tax Refund Doesn’t Catch You Up?

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Like most businesses, mine has patterns. One of those patterns is that someone will call me about this time of year and we will talk for a bit about a possible bankruptcy filing. Then, I won’t hear anything back from them for several months. What happens is that shortly after talking to me, the caller discovers that he is going to be getting a substantial tax refund – enough to get caught up. Of course, in some cases they are right; and I never hear back from them; and that is a good thing.

Then, there are the people who are calling back in May or June. They got a $3,000 or $4,000 tax refund. They threw it all at the problem bills. Those payments paid a ton of interest. A few months later, they realized that they are still in trouble. Their tax refund bought them a little bit of time and not much more. So much of it went to interest that it didn’t really reduce their principal balances much. They still can’t pay the debt. They still can’t save for retirement. They still can’t help their kids save for college. They still need dental work they can’t afford. They still have cars that desperately need new tires. Oh, and they have $0 saved to pay for a bankruptcy filing.

If you think you will, “get caught up” with your tax refund; do a lot of math first. How much of your payments will actually reduce the principal. What interest rates are you paying and how long will it take that rate to increase your balances more than your refund reduced them? How long will it be before you can start doing the things you need to do – like plan for retirement, college costs, oh, and just how long will those tires last, anyway?

I don’t actually mean to be this depressing, and if your tax refund will get you out of trouble; more power to you. If all it will do is buy you some time, then maybe it is time to take a deep breath and consider where your real responsibilities lie – Visa, Master Card or your family’s future? Personally, I like to think that Visa and Master Card are big enough to take care of themselves.

Ok, so you still really want to pay this. Great. Pay it. But wouldn’t paying it without interest be a better solution than what you are currently fighting? There is a way to do that. It isn’t fun, it isn’t quick and easy; oh, and it isn’t cheap. It is called a Chapter 13 Bankruptcy. Yes, it is a bankruptcy; but it is a bankruptcy that lets you take five years to pay as much of your unsecured debt as you can – with NO interest.

Do the math, and do it before you throw yet another tax refund at 28% interest charges.

Elaine