Tag Archives: Taxes

Taxes, State and Federal

Bankruptcy, the Fiscal Cliff and Tax Refunds

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Evidently, we have a deal on the fiscal cliff — well, sort of.  We have a deal for two months, and then all bets are off.  So, I’m not completely sure that what I have read so far accurately describes the contents of this deal (so double-check my facts before relying on them, please); but even better, anything that does (or doesn’t) change today might in 60 days or so.  I’m sorry, but Congress needs to grow up.

What does this have to do with Bankruptcy and Tax Refunds?  Well, first of all, it appears that the tax exemption for forgiveness of debt income on a principal residence has been extended for a year — or at least until March.  So, if your primary reason for filing for bankruptcy was to avoid tax consequences from a foreclosure or short sale; now, you may not need to.  The emphasis there is on MAY.  Do pay the relatively trivial amount of money to check this with a qualified tax expert — which I am not, and this tax exemption is deceptively complicated.

Now, for the bad news, your pay check will get smaller.  Tax withholding rates are going up 2%.  Most people who file for Bankruptcy have been living pay check to pay check  for many months.  A 2% withholding hit can make all the difference in the world between keeping the heat on and not.  Of course, the problem is that filing for bankruptcy isn’t cheap; and if you are living close to the edge, you probably don’t have the cash laid by for attorneys fees and filing fees.  So, before you spend your 2012 tax refund getting current on bills (like credit cards) and then realizing that you’ve blown your refund and still owe more than you can pay; consider whether you will be better served using that money to pay for a bankruptcy filing.

Every year people call me in late April or May who got back several thousand dollars in March or early April.  They spent that getting current on a bunch of debt and then realize a month later, that their balances aren’t going down and their income isn’t going up.  If your tax refund is enough to get you out of trouble, enough that you won’t need to file, enough that you will then be in a position to take care of yourself and your kids instead of Chase and Discover; then, by all means, use it to pay the bills — but do the math first.  Then, take a look at your retirement accounts and your kids’ college funds.  J.P. Morgan Chase made record profits in the 3rd quarter of 2012.  Did you?

Elaine

Debt Settlement Regulation

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There is a movement afoot to increase the regulations governing debt settlement companies.  These are the companies who advertise that they can negotiate substantially reduced deals with your credit card companies.  If you have seen a banner ad that says something like, “Reduce your credit card debt by 40-50%”, odds are you have encountered a debt settlement company.

USAToday.com ran an article today on this very topic.  They interviewed a couple of people who had used debt settlement companies, one got bad results, one got good results.  Over the years I have seen a lot of clients who have used one of these companies before coming to see me.  I have them bring me there contracts.  Some of them are downright appalling.

There are two problems with the debt settlement business model.  In order to do it well you have to really work your files and you have to be very, very good.  There may be a way to do it well representing people in other States, but I don’t see how.  To do it well, in my opinion, you need to be prepared to aggressively defend collection litigation as it gets filed.  (If you are considering a debt settlement company, read the contract completely but pay particular attention to what they do with the money you send them and what they will, or more likely won’t, do if you get sued during the process.)

I have heard of a good debt settlement company in Texas.  They only take clients in their area, and I heard a presentation about them some years ago; but I no longer remember their name.  Even a good debt settlement company can’t get you out of the second problem.

If you “settle” debt by convincing a creditor to accept less than it is owed, the amount that you don’t pay will get reported to the IRS as forgiveness of debt income.  I have written about that before.  This means that unless you meet certain tests and deal effectively with the IRS, you could wind up having to pay taxes on the amount of debt that was forgiven.  Oops.

Debt settlement companies know how to say what desperate people want to hear.  Just remember the old rules.  Read everything.  Don’t sign anything you haven’t read or that you don’t understand.  When in doubt call the Better Business Bureau, and always know where the money goes and who gets it.

Elaine

How Not to File a Means Test

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Most people who have read much of anything about Bankruptcy law in the last few years have heard about the much vaunted Means Test.  Personally, I don’t think it is all that big a bugaboo.  It does, however, eat time and documentation, require significant amounts of attorney time and expertise; and, as a general matter, drive clients up the nearest wall.

So, my favorite Means Test sleaze is to not file one.  Just don’t bother.  Leave the blessed thing blank.  You see, 707(b)(2) only applies to debtors whose debts are primarily consumer.  So, if your debts are primarily NOT consumer — no Means Test.  You check the little box and go on.  The problem for most people is that their mortgage balance is sufficient to tilt them over to the consumer side of things, but occasionally, that doesn’t happen.

So, every once in a while I get to file a bankruptcy and just skip the Means Test.    That is my kind of fun.

Elaine