Tag Archives: Taxes

Taxes, State and Federal

What Can I Do NOW — I Can’t Pay My Bills

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One of the worst parts of the Coronavirus shutdown is the uncertainty.  When will it end?  What bills will still have to be paid?  When will they have to be paid?  Will my job still be there?

No matter what the answers are to any of those questions, there are some things you can start doing now to be prepared for whatever the answers are.

Here is a list:

  • Check your credit report;
  • Make a list of everyone you owe money to — names, addresses, account  numbers, contact telephone number, total amount owed, payment amount due;
  • Get your 2019 taxes prepared if they aren’t already (and any missing prior years while you are at it);
  • Review your household budget;
  • Collect pay stubs or other evidence of income for at least six months.

This information will help you deal with creditors when it is time to do that.  It will help you apply for whatever forms of assistance may be available for you.  It will help you prioritize what income you have (now or later); and, if necessary, it will facilitate a bankruptcy filing if that becomes necessary.

Elaine

Lawsuits, Bankruptcy and the Automatic Stay

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A bankruptcy filing automatically stays (or temporarily stops) all collection activity against the debtor or property of the debtor; and that includes virtually all lawsuits involving the debtor. That is the easy answer. Yes, a bankruptcy filing will stop that lawsuit against you! It just isn’t always the whole answer.

Most of the time when people call they are asking about a simple collection case – an old credit card, medical bills, maybe the balance due after a repossession. In those cases a bankruptcy filing stays the lawsuit; and when the discharge is entered a few months later, the lawsuit is stopped for good. That answer is accurate for the vast majority of callers. So, if you are worried about a simple collection case, a Bankruptcy will fix it.

The problem comes when whomever answers the phone in the law office doesn’t ask enough questions. If the lawsuit isn’t a simple collection case, for instance, if the person calling is being sued by a former employer for stealing or embezzling money. If the lawsuit is alleging any type of fraud. If the lawsuit is alleging intentional and willful injury to property. If the lawsuit is a paternity action or an attempt to collect past due child support or alimony. Those lawsuits won’t just go away, although the Bankruptcy filing will slow them down some. The worst scenario, though, is a case that looks look like a simple breach of contract case or maybe simple negligence, it may be between former business partners or friends; but the case has gotten emotional and angry and it has become more about a pound of flesh than recovering specific economic damages. In other words, the worst case scenario is a lawsuit that has started to look more like a divorce than normal litigation.

In those cases the answer is still correct that a Bankruptcy filing will stay the lawsuit – it just might not end it, and it really might not stop the fight.

The Bankruptcy Code includes a list of things that are excepted from the Debtor’s discharge. That means that even though the Automatic Stay might stay the problem, when the stay is replaced by the discharge, this type of problem will still be there – waiting. The most common of these are debts incurred shortly before the bankruptcy was filed (presumably with the intention of filing bankruptcy and not paying it), student loans, recent taxes, child support or alimony.

Some of these require that something called an Adversary Proceeding be filed within the bankruptcy. Some of them don’t; and some times the creditor may just cause other problems within the bankruptcy. Stay tuned for more on this subject. I will tag these posts as “persistent creditors” to make them easy to find.

Elaine

Afraid to File Your Taxes?

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Trust me. I get it. Lots of us are afraid to file our tax returns – well, ok, afraid to prepare them may be closer to the truth; but, trust me, I get it.

– and it just got worse.

Not filing your taxes has always been bad. Filing late has always had some consequences, but most of them were manageable. Now, there is a new one.

In the last week of 2014 the 10th Circuit Court of Appeals handed down an opinion agreeing with an earlier decision from the 5th Circuit. So far, they are the only two circuits to hear this particular issue; and they agree. This is not good.

Here is the problem. Generally, speaking income taxes are dischargeable in a bankruptcy proceeding provided that they meet certain requirements. Like with anything involving either the Bankruptcy Code or the Tax Code (let alone both), there are more rules, limitations and exceptions to the basic rules than holes in Swiss cheese. Still, generally speaking, if the taxes meet certain age tests they are dischargeable in a bankruptcy filing – any chapter. Well, the 10th Circuit, following the 5th, has added a new wrinkle.

According to these Courts if the returns were filed so much as a day after they are due, the taxes on those returns are never dischargeable in a Bankrutpcy. Of course, if they are filed before the expiration of a properly granted extension, they are not late. If they are filed after the extension expires, however, or if no extension is granted; then, we have a whole new problem.

I have a case right now where a client has filed a bankruptcy, and taxes are a major part of the debt. I just went through every one of her tax transcripts. One of those returns was filed late. Anywhere inside the 5th or 10th Circuits the taxes on that return are not only not dischargeable in this Bankruptcy – they will never be eligible for a discharge. Oh, and the date on that return? Filed less than two weeks after April 15, and no request for extension was filed.

This seriously sucks.

Elaine

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

They Said I Can’t Bankrupt That

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I get told this a lot. Someone calls and they have talked to a loan company, a debt collector, or the guy on the next bar stool at a local dive. What I hear is, “They said I can’t bankrupt that.” Well, of course not. Bankrupt is an adjective. To Bankrupt is not a verbal – of any kind. You can be described as bankrupt, but there is no such action as to bankrupt. The moral of this story is, of course, don’t take legal advice from anyone who speaks English this poorly. In fact, don’t take legal advise from non-lawyers – especially when they are trying to get you to pay them for a debt or if you aren’t sure just how many drinks they have already had.

Now, are there debts that cannot be discharged in a Bankruptcy? Sure, and some of them you will kind of know, and there are a few that will probably surprise you.  For instance, most people are pretty comfortable with the idea that you can’t discharge child support in a Bankruptcy.

However, most people probably don’t know that you can’t discharge a debt for willfully or recklessly failing to maintain the capital of a Federally insured financial institution. Don’t worry if you don’t understand what that means, it almost certainly doesn’t apply to you.

I will concede to being a bit silly (or snarky, your call) with that last example, but the fact is that there is a section of the Bankruptcy Code (11 U.S.C. §523) that lists all of the debts you cannot discharge (or get out of) in a Bankruptcy. In the copy of the Code I keep handy, that section is five pages long, and very little of those five pages apply to the vast majority of  people with more debt than they can pay.

In fact, no matter what you have heard about the 2005 Bankruptcy Reform Act there is no general exception from discharge for credit card debt. That’s right. Despite what that debt collector told you, absent certain general restrictions, a Bankruptcy filing will still discharge most, if not all, of your credit card debt – and your medical debt – and pay day loans – and even in many cases old income taxes. Really.

The exceptions to discharge that apply most commonly  are:

  • Child support;
  • Alimony;
  • Property division or other divorce related debt (in a Chapter 7 Bankruptcy);
  • Student loans;
  • Debt incurred by fraud or shortly before a Bankruptcy filing; and
  • Recent taxes (rules are complicated).

Embezzlement? Well, that is a problem. Lying on a loan application or borrowing money with someone else’s identity, forging loan documents, taking the vacation of your lifetime in Paris paid for by Visa with the intention of filing for Bankruptcy before those bills come due?  These are all at least as non-dischargeable as you should think they are.

All silliness aside, here is what you need to remember. Most people who file for bankruptcy can discharge all, or virtually all, of their debt. There is a five-page laundry list of debts that cannot be discharged in a Bankruptcy, and for the most part, none of them are simple; and most of them are not all that common. The odds are very good that no one other than an experienced bankruptcy attorney can discuss any of them with you in any detail. Most people know just enough to be dangerous about Section 523, and that includes a large number of lawyers who don’t practice bankruptcy law on a regular basis.

If you have any questions about whether or not a debt is dischargeable, ask a lawyer who practices in the Bankruptcy Courts regularly. If anyone else tells you that something is not dischargeable, take that advice with a large helping of salt – especially if they think Bankrupt is a verb.

Elaine

 

When Creditors Don’t Go Away — Part 1

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In most cases someone files for bankruptcy, he lists all of his creditors with their addresses, account numbers and at least an approximate amount owed; the creditors receive notice of the Bankruptcy, then they receive the discharge; and they go away.  The general rule is that the Debtor will not hear from any of his creditors again once the Bankruptcy is filed.  (This post only pertains to debts that may or may not be included in the discharge.  It does not apply to creditors who don’t comply with the Automatic Stay.)

There are exceptions.  First of all, there are certain debts that are automatically not included in a discharge.  That means that once the Bankruptcy is over the Debtor is still liable for the debt.  The most common examples are recent taxes, child support or alimony and student loans.  These, the debtor can expect to have to deal with once the discharge is entered and are not generally a surprise.

Then there are the others.  There are lots of reasons why a debt will be excepted from the discharge, and some of them aren’t as predictable as recent taxes.  The complete list included in the Bankruptcy Code (and there are a few other provisions elsewhere in Federal Statutes, but they are really rare) is found at 11 U.S.C. Section 523.

If you file for Bankruptcy and a creditor thinks that you have defrauded them, obtained money by embezzlement or false pretenses, or otherwise come within the scope of a Section 523 objection to discharge, then the creditor may decide to ask the Court to exclude this debt from your discharge.  The vehicle for doing this is what is called an Adversary Proceeding, which is essentially a separate lawsuit filed within the scope of the Bankruptcy filing.  Adversary Proceedings are actually quite rare, but they do happen.

This is what can happen when a creditor isn’t willing to go away and wants to try to establish that his debt should be excepted from the discharge.  First, the creditor may appear at your First Meeting of Creditors.  This is not required, but if the creditor is local or has local counsel, it is an easy way to start to feel out the case.  The First Meeting of Creditors exists for creditors and the Trustee to ask questions, and a creditor looking to build a case for an objection to discharge may use this as an opportunity to ask a few, basic questions.  If they want to ask very many questions, the Trustee will tell them to set a 2004 Examination.

A 2004 Exam is the next step, and again it is not mandatory.  A 2004 Examination is basically a deposition.  It is a meeting in a conference room that will be recorded one way or another, it will be under oath, and the creditor who requests the exam asks the Debtor (or other party) questions.  The debtor can be required to bring documents to the meeting, and it can generate a great deal of facts that the Creditor can use to build his case against the debtor.  A 2004 Exam must be authorized by the Court, and the Court has the authority to limit it in scope or duration.

Finally, the creditor must file an Adversary Proceeding (unless his debt is automatically excepted from discharge like child support or student loans).  An Adversary Proceeding is really just a lawsuit, but it is filed inside the Bankruptcy.  Once it is filed it will proceed like any other civil case, with discovery, motions, and it will finally culminate in a trial with witnesses and exhibits but no jury.  One of the important things to remember about an Adversary Proceeding is that it must be filed by a deadline that is set when the Bankruptcy is first filed.  That deadline can be extended, but it cannot be missed – unless the creditor didn’t get notice of the filing.  Yet one more reason why you must give your lawyer a complete list of everybody you owe money to with their addresses!

I cannot repeat strongly enough how rare most of these things really are.  Creditors are not going to spend good money to send someone to a First Meeting of Creditors just because they can.  Likewise, filing an Adversary Proceeding is a significant investment in time and money; and creditors don’t do that without good reason.  There are certain flags that your attorney will be watching for when he prepares your case that indicate an Adversary Proceeding may be likely.  If that is the case, he should go over that with you.  It is incredibly rare for an Adversary Proceeding to be filed that is a real surprise to the debtor and debtor’s counsel – assuming that the Debtor has been fully above board with his lawyer.  So talk openly and honestly with your lawyer, ask if there is a debt you are concerned about.  A big part of your attorney’s role is helping you to evaluate risk and putting you at ease when you are worrying about things that aren’t likely to be an issue.

Elaine

Yes, Virginia, You Can Discharge Taxes in Bankruptcy — Sometimes.

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Taxes and bankruptcy is a complicated subject.  There are multi-volume book sets written on the issue.  Still, there are some general rules that a blog post can cover.

First of all, you have to determine what kind of taxes you owe.  Personal income taxes, business withholding taxes, sales taxes, property taxes; they are all treated differently.

The most common case is personal income taxes.   In order to determine whether or not your personal income taxes are dischargeable, your attorney will need to know four things.

  • When the returns were due, that includes lots of things, but the big one is whether or not you filed for an extension;
  • When the return was actually filed, and that means received by the IRS not just put in the mail;
  • When any taxes were officially assessed by the IRS, and this includes any assessments following audits or revisions to the return;
  • Finally, your attorney will need to know if you have filed a Bankruptcy or made an Offer in Compromise since the time the taxes were incurred.

In order to be absolutely sure about these dates your attorney will probably require a tax transcript that includes all of this information.

The general rule is that personal income taxes become dischargeable in Bankruptcy once the returns have been due for at least three years, the returns have been on file for at least two years and the taxes have been assessed for at least 240 days.  These rules make certain assumptions — the returns were not fraudulent, the taxpayer has not made any attempts at tax evasion, etc.

Then, of course, there are the exceptions; and there are way too many exceptions to go into them here.  Although one exception that is developing rapidly (and not in a good way) is the effect of a late filed return on the ability to discharge taxes.  This is an area where you just have to talk to an attorney, and again this is an area where a tax transcript is invaluable.

You should never assume that taxes will (or won’t) be dischargeable until you have actually talked to an attorney and probably gotten transcripts for the appropriate years.  Still, in most cases where these three rules are met, the taxpayer may file for bankruptcy and discharge his personal liability for the taxes.  That filing will not avoid any tax liens that have attached to property prior to the filing, but it will stop liens from attaching to after-acquired property and it will stop the IRS from attempting to collect from you personally.

It is not uncommon for people to come see me who have many years of past-due taxes owed.  In some cases those taxes add up to hundreds of thousands of dollars.  In many cases they have been making payments for years and have done so without realizing that unless otherwise indicated the IRS will apply payments to the oldest outstanding tax year.  In many cases a Bankruptcy filing will not discharge all of their taxes, but it can convert an unmanageable debt into a manageable one.

So, if you have more tax debt than you can pay, don’t discount the possibility of contacting a bankruptcy attorney.  Do mention when making the appointment the amount of taxes in play.  Not all attorneys are comfortable filing cases with large amounts of tax debt.  So, don’t be surprised if the first attorney you contact refers you to someone else.  Also, don’t expect to get completely out of trouble; but you may be very surprised at what a bankruptcy can do for you.

Oh, and if you remember one thing from all of this, file your tax returns ON TIME.  If you can’t pay, you can’t pay; but file your returns ON TIME.  Extensions are fine, just file before the end of the extension period.  Returns not filed timely can create a problem you can’t change.

Elaine

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

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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

Short Answers to Complicated Questions

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Frequently when I get a call from someone considering a bankruptcy filing, the first question I’m asked is — complicated.  Here are a few examples.

Are taxes dischargeable in Bankruptcy?

That depends.  Some taxes, like sales taxes and some withholding taxes are never dischargeable.  More commonly I am asked about income taxes, and not surprisingly the rules are complicated.   The most important thing I can tell you in brief is that when you see tax problems developing (and they usually snowball on you), file your returns on time.  Extensions are fine, as long as you file before theyexpire.  If you can’t pay, well, you can’t pay; but file the return.  There are three time frames that must be met before income taxes can become dischargeable, and one of them runs from the time that the tax return was filed.  There is also some troubling case law developing in other parts of the Country limiting dischargeability for late-filed returns.  Of course, if the IRS has filed a substitute for return, that is a whole different ball game.  Yes, I know, this doesn’t make a lot of sense.  It is a short answer to a very complicated question.  Just remember to file your returns timely, and if you wind up way over your head with tax debt, contact a qualified Bankruptcy attorney in your jurisdiction for a consultation.

If I file for Bankruptcy, can I keep my car?

Well, that depends on a lot of things — is it paid for, are you current on it, how much equity do you have in it, have you maintained insurance, can you afford to make the payments?

Think about this one for a minute.  There were over 6300 people who filed for Bankruptcy in the Western half of Oklahoma last year.  If they were all hitchhiking to work, don’t you think you would have noticed? Generally, the impetus for this question is a deep seated sense of shame and a fear that you have been bad and are going to be punished.  I don’t mean to belittle this, it is very real; and most of us have a voice in the back of our heads that says things like this to us, but bankruptcy isn’t about punishment; and most people who file for Bankruptcy keep their cars.   Are there exceptions?   Yes, but that is a whole different blog post.

I’m married, does my spouse have to file with me?

Probably not.  Now, are there reasons why you may want to file jointly?  Yes.  Are there times when you both need to file in order to get a particular result that you want?  Yes.  If your spouse doesn’t file with you, will your filing affect your spouse?  That really depends, and that is one of many reasons why I require that non-filing spouses attend the initial appointment with the filing spouse.

Is the Trustee going to come to my house?

Well, I don’t know.  Are you inviting him for dinner?  Seriously, now, the Chapter 7 panel trustees are highly compensated professionals who get paid a very small amount of money to administer cases.  They make their money administering non-exempt assets.  No one is paying them to go through your sock drawer.  Now, if a Trustee has reason to believe that you are concealing valuable assets, can a Trustee get a search warrant for your home or office?  Well, yes; and in 22-years of practice, I have seen that happen once.  The Debtor went to prison for a number of years for all kinds of fraudulent behavior.  So, don’t hide uncashed royalty checks; and the Trustee will not be paying you a visit.

Elaine