Posts Tagged ‘chapter 7’

Four Hoops to Jump Through to Write Off Income Taxes in Bankruptcy

In Uncategorized on November 11, 2011 at 12:23 pm

The conditions you have to meet to write off an income tax debt actually make sense. And understanding those conditions is a lot easier if you understand the sense behind them.

In my last blog I introduced the four conditions for discharging taxes in a Chapter 7 “straight bankruptcy,” and said I’d explain them in this blog today.

This is made easier by the fact that there is a single principle behind all four of these conditions: bankruptcy law believes that taxpayers who pretty much follow the tax laws should be able to write off their tax debts just like the rest of their other debts, after first giving the IRS (or other tax authority) a sensible amount of time to collect the taxes.

How long is this sensible amount of time? How much of an opportunity do the tax authorities have to collect before you can discharge the tax debt? Each of the four conditions measures this amount of time differently, based on 1) when the tax return for the particular income tax was due, 2) when the tax return was actually filed, 3) when the tax was “assessed,” and 4) whether the tax return that was filed was honest and therefore reflected the right amount of tax debt when it was filed. You must meet all four of these conditions, all four of these measures of time.

Taking them one at a time:

1) Three years since tax return due: Every income tax debt has a fixed point in time when its return had to be filed. That date is extended by a certain number of months if you asked for an extension, but it’s still a fixed point in time, one that can be easily ascertained. So this first condition gives the tax authorities three years to collect, three years from a fixed point not affected by your actions (the timing of filing the return) or their actions (audits, legal disputes).

2) Two years since tax return actually filed: In contrast, this is a time period triggered by your own action. Notice above when I stated the overall principle at work here, I said you must “pretty much” follow the tax law. Thus you can file a tax return late and still be able to discharge the debt if at least two years has passed since you filed the return.

3) 240 days since assessment: Assessment is the tax authority’s formal determination of your tax liability, usually by its review and acceptance of your tax return. Normally an income tax is assessed within a few weeks that it is received, so the 240 days since assessment usually passes way before the above three-year or two-year time periods. But the law has to account for the less common situations when assessment is delayed. So, when a tax is subject to a lengthy audit or litigation, or an “offer-in-compromise” (a taxpayer’s formal offer to settle), and the three-year and two-year periods have passed, the tax authority still has 240 days after assessment to chase that tax debt.

4) Fraudulent tax returns and tax evasion: This last condition essentially says that none of the above time periods are triggered at all if you are intentionally dishonest on your tax return or try to avoid paying the tax in some other way. If you are cheating on your taxes then the tax authority has no opportunity to collect the debt, so you cannot discharge the debt, regardless how old the tax is.

If your tax debt can jump through these four hoops, you should be able to discharge that tax in a Chapter 7 bankruptcy.

But what if you owe taxes which do not meet these four conditions? What if some of your taxes do but others do not? Or what if the IRS has recorded a tax lien? Or if a lot of the taxes came from operating a business, or are not income taxes but some other kind? I’ll tell you about these situations in my next blogs.

– Patrick J. Conway, attorney.


Writing Off Income Taxes with a “Straight Bankruptcy”

In Uncategorized on November 9, 2011 at 3:43 pm

You don’t always need to file a Chapter 13 case—with its 3-to-5-year payment plan–to deal with income tax debts. Thinking that you do is a myth, alongside the broader myth that “you can’t write off taxes in a bankruptcy.” Both have a kernel of truth, which is why they persist. It’s true: some taxes cannot be discharged (legally written off) in bankruptcy. But some can. And it’s true: Chapter 13 is often an excellent way to solve tax problems. But that does not necessarily mean it is the best for you. Instead Chapter 7 might be.

Chapter 13 tends to be the better tool if you owe a string of income tax debts including relatively recent ones. Why? Because in this situation Chapter 13 gives you the best of both worlds. First, if you owe recent income taxes which cannot be discharged, you get lots of advantages under Chapter 13, including paying less by avoiding most penalties and interest. That can be a huge savings, especially if you can afford only relatively small payments. Second, if you have older back taxes, these are also wrapped into the Chapter 13 plan, often without you paying any more into your plan, then they are discharged at the end of your case.

But you DON’T NEED the best of both worlds if all or most of your income tax debts are dischargeable. Then Chapter 7, the straightforward “straight” bankruptcy is enough.

So, WHAT are the conditions for a specific income tax debt to be discharged in Chapter 7? How are you going to know if Chapter 7 will discharge all or most of your taxes so that it is the right option for you?

Some of the conditions for discharge of taxes are quite straightforward. Some are more complicated. And as you’ll see, some are even purposely vague. So unfortunately it’s not as simple as plugging a particular tax debt into a clear formula to see if it is dischargeable. Determining whether a particular tax debt will be discharged requires the careful judgment of an experienced attorney.

I’ll just list these conditions for discharging income taxes here, and then explain them in my next blog. Don’t be surprised if they sound confusing in this list. It’s true: anything having to do with taxes tends to be complicated!

To discharge an income tax debt in a Chapter 7 bankruptcy case, it must meet these conditions:

1) Three years since tax return due: The applicable tax return must have been due more than three years before you file your Chapter 7 case. And if you requested any extensions for filing the applicable tax returns, you have to add that extra time to this three-year period.

2) Two years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.

3) 240 days since assessment: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.

4) Fraudulent tax returns and tax evasion: You cannot have filed a “fraudulent return” or “willfully attempted in any manner to evade or defeat such tax.”

You can see that these are begging for some clarification. For that please come back to read my next blog. Or else call to set up a consultation with me. If you have substantial tax debts, you should definitely get some thorough personal advice. Know your options so you can make an informed choice, about bankruptcy and otherwise.

– Patrick J. Conway, attorney.

Strip Down Vehicle Debt

In Uncategorized on July 22, 2011 at 10:33 am

Its possible to reduce the debt on your vehicle by filing a bankruptcy case. This benefits vehicle owners who owe more than their car is worth. Both chapter 7 and chapter 13 allow for reducing the vehicle loan.

In chapter 7, you can reduce the debt if you qualify for a redemption loan. The new creditor pays the vehicle’s fair market value to your lender. The remaing debt is discharge by the bankruptcy court.

In chapter 13, you may propose a plan that pays the fair market value provided the loan is at least 2.5 years old. The payment for the vehicle is included in the monthly payment you make on all your debts.

Change Your Chapter 13 Plan

In Uncategorized on July 6, 2011 at 1:23 pm

A client told me recently that her employer reduced her hours. She expects to earn $500 per month less that her previous income. Fortunately, chapter 13 provides flexibility in situations like hers. In many cases, its possible to change the payment amount. The law requires a showing of a substantial change in circumstances. She should have no trouble in meeting this requirement.

We can’t always change the amount of a chapter 13 plan payment. For example, plans must pay out in a maximum of five years. If the proposed payment change is too great, then the court does not approve it. But if you have a change, don’t hesitate to call to see if we can’t change the plan payment.

Home Values Keep Falling

In Uncategorized on April 22, 2011 at 9:38 am

Local property values fell by eight percent compared with last year’s values. This from a new report by the Hamilton County Auditor. Values declined in nearly every county neighborhood. Other reports show that home sales and prices continue to fall across the Greater Cincinnati and Northern Kentucky region. Forty-five percent of all sales in March were lenders selling properties recently in foreclosure or a short sale.

All this is bad news from people trapped with a house payment that can no longer afford. Declining values make it more difficult to borrow or sell their homes.

Bankruptcy can help in a couple of ways. Chapter 13 gives people a way to catch up missed house payments. It some cases it allows the home owner to eliminate a second mortgage. Chapter 7 protects the owner from the mortgage debt if the owner wants to give up the house.

Garnishments Can Be Recovered

In Uncategorized on February 25, 2011 at 3:18 pm

In some cases debtors can sue to recover garnishments taken within 90 days of the bankruptcy filing. The catch is that the debtor must be able to claim the garnished funds exempt.

Ohio residents can exempt a maximum of $1,500. Kentucky residents can exempt much more, almost $10,000. Kentucky residents can claim federal exemptions. Ohio residents must claim Ohio exemptions in most cases.

Can I Keep All Of My Tax Refund?

In Uncategorized on February 4, 2011 at 2:44 pm

In Ohio chapter 7 cases, you may keep up to $1,500 of your refund. Add to that amount child tax credit and earned income credit claimed on your return. In most Kentucky 7 cases, you can keep it all because the exemption law is better than Ohio.

In Ohio chapter 13 cases, you can keep $800 of the refund per person plus child tax credit and earned income credit. In Kentucky 13 cases, you may have to turn over part of the refund if the trustee requests it.

Tax refund that you pay to the court is distributed to your creditors.

Your Employer Can’t Fire You Because Of Bankruptcy

In Uncategorized on January 28, 2011 at 1:07 pm

No private employer may terminate an employee solely because the employee filed for bankruptcy. Its part of the Bankruptcy Code. The government cannot fire an employee and cannot withhold or deny a llcense, permit, records and so on. You cannot be denied a student loan because you filed a bankrutpcy case.

Chapter 7 and Chapter 13: Which Is Best For Me?

In Uncategorized on January 21, 2011 at 10:58 am

Both bankruptcies protect you from lawsuits, garnishments, and contact with creditors. Both give you a discharge from personal liability on most debts.
Chapter 7 is designed for people with low income. So low that even if they had no debts they could just pay their monthly living expenses. The court gives these people a discharge of debts without requiring them to make payments on them.
Chapter 13 is for people with enough income to cover monthly living expenses and still pay part of their debts. They pay on the debts for three to five years. Once they complete the payments, they receive a discharge of most unpaid debts.
Chapter 13 has advantages over chapter 7. It allow people to catch up past due house and vehicle payments. It can lower monthly payments for debts that survive chapter 7, like taxes and student loans. When you meet with me, I can discuss the pros and cons of both types of bankruptcies.

You can file bankruptcy without your spouse.

In Uncategorized on January 6, 2011 at 1:59 pm

But the fact that you are married can affect your case.

If you and your spouse are married and living together, then you have one household. If that’s the case, your spouse’s earnings count and must be considered to determine if you are eligible to file a chapter 7 case – straight liquidation – or whether you must file a chapter 13 debt adjustment case – along with payments to creditors for up to 5 years.

A married person must take into account his or her spouse’s income. The spouse’s separate expenses, like personal credit card bills, are deducted from household income. Anything remaining is considered disposable income which is placed to household uses and therefor available to pay the filing spouse’s debts. If the non filing spouse makes enough money, then the filing spouse may be required to file a chapter 13 case or run the risk of having his or her chapter 7 case be subject to a motion to dismiss as abusive.

If you are married and living separate and apart, you probably won’t have to include your non-filing spouse’s income. Each of you now has your own household. If you are married but divorcing, you may be deemed to have separate households even if you live in the same dwelling.

So if you are married but are thinking of filing bankruptcy separately, ask a bankruptcy lawyer who understands marital law what this means to you and your non-filing spouse.