Tag Archives: IRS

The Government is Shut Down, Can I Still File for Bankruptcy?

Yes, for now.  Probably.

Believe it or not, the question of how the government shutdown would impact the practice of Bankruptcy consumed most of my morning last Tuesday; and I was not alone.

The simple answer is that the Federal Courts, of which the Bankruptcy Courts are a part,  announced on Monday that they had enough money to continue operating normally for two weeks.  Most of that money comes from filing fees, and I suspect a large percentage of it comes from Bankruptcy filing fees – but I regress.  So, the simple answer is – no problem for two weeks, then the Courts reassess.

Not so fast.  The bankruptcy system is overseen by the U.S. Trustee’s office, which is a division of the Department of Justice; and almost all of them are furloughed.  Many bankruptcy cases have the IRS, the SBA or some other Federal agency as an active party.  They are all furloughed, and if they aren’t, odds are that their bankruptcy lawyers are from the Department of Justice; and they are furloughed.  So, now what.

One thing that my court did quickly, and that appears to be unique to my jurisdiction is that my Judges entered a General Order staying all matters in Chapter 7’s and 13’s to which the IRS is a party.  Well, we are taking that to mean in which the IRS is an active party.  Technically, the IRS is a party in almost all Chapter 7’s and 13’s.  So, the two objections to claim that I filed last week in the same case now have different response dates, and one hearing date has been indefinitely postponed.

Also, the case trustees are not Federal employees, they are private attorneys; but they are appointed by the U.S. Trustee’s office.  They remain on the job, but I am unsure how long they will continue to be appointed to new filings.  First Meetings of Creditors continue to be held as scheduled, except, of course, neither the IRS nor the U.S. Trustee’s office will be there asking questions I would generally rather my clients weren’t being asked.  In fact, this may be a uniquely good time to file a case with means test issues.  Actually, a month ago probably would have been better. . . . I am teasing – sort of.  It would be interesting to see how that would play out.  If the US Trustee can’t object to a bankruptcy filing because the staff is furloughed, does that toll the time in which the objection must be made?  I wouldn’t think so, and it will be really interesting to see how the Courts deal with that issue, and they almost certainly will.

In the meantime, cases are filing like normal.  The automatic stay (i.e., bankruptcy protection) is going into effect just like always.  Most cases are proceeding normally at this point.  How thing will change if this continues for long, I don’t know.  I am reasonably sure of one thing, though.  The Bankruptcy courts are not going to stop accepting new filings anytime soon.  Bankruptcy cases all include a filing fee – $281 for a Chapter 13 and $306 for a Chapter 7 filing; and the Federal Courts are far too broke to turn that down.

Elaine

Old Debt, Foreclosed Home, 1099 in the Mail — Oh NO!

Once upon a time the start of tax season was heralded by would-be clients who had been to see me sometimes months earlier calling very excited, because they finally have the money to file.  Then, there are the Trustees wanting a share of tax refunds that accrued to debtors prior to the filing of their bankruptcies — those calls are less fun.

Recently, though, tax season has started a bit earlier — in January and early February.  Former clients are calling scared, because they have just gotten a 1099 in the mail for some HUGE amount of money that they thought they had discharged in their Bankruptcy — and they are right.

Any time a creditor “forgives” debt, which is a very broad term and doesn’t necessarily have anything to do with whether or not they still intend to collect it or the Debtor still owes it, the creditor is required to send a 1099 for the amount of the forgiven debt to the Debtor and the IRS.  The IRS is then going to assume (unless told to the contrary) that this amount is to be included in the debtor’s gross income for that taxable year.

Breathe.  I promise, it isn’t nearly this bad.  Go back and read that “unless told to the contrary” part again.  If you have filed for Bankruptcy and discharged your personal liability for debt, it does not have to be included in your taxable income.  There is an IRS form 982 that will solve this problem for you.  Form 982 deals with 1099’s if the debt has been discharged in Bankruptcy or if the Debtor was insolvent at the time the debt was forgiven.  The insolvency exception is considerably more difficult and more treacherous.  The Bankruptcy (Title 11) provision is much more straight forward.

There are different rules if the forgiveness of debt involved your homestead, and the property was foreclosed or the subject of a short sale; but the 1099 may still qualify to be excepted from your taxable income.  In that event, I suggest you talk to a competent CPA.   Likewise, if you have any questions regarding the application or use of Form 982, a CPA is the person to call.

Where those 1099’s can be a real issue is if you did some type of debt management plan where you paid less than 100% of your debt.  If it was a Chapter 13 Bankruptcy, Form 982 may still apply.  Otherwise, you might have a real problem; and you cannot call a CPA for help too soon.  I hate getting calls from people who tried to do the right thing, tried to pay their debt; and then after years of scrimping and suffering find out after the fact that they now owe tax on the total amount (including interest) that they didn’t pay.  A Chapter 13 Bankruptcy would likely have been cheaper, more effective and actually gotten them out of debt instead of into tax debt.

So happy tax refunds, and do not pay tax on discharged debt unnecessarily!

Elaine