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Archive for the ‘tax returns’ tag

Filing Chapter 13 in 2019 to Write Off More Income Taxes

January 14th, 2019 at 8:00 am

Chapter 13 is a riskier, longer, and maybe more expensive way to escape a dischargeable income tax debt—but may still be your best option. 


Last week we showed how to permanently write off (“discharge”) more of your tax debts through Chapter 7 “straight bankruptcy.” Today we show how to do this with Chapter 13 “adjustment of debts.”

Why Use Chapter 13 If Chapter 7 is Faster and Cleaner?

Chapter 7 is a very fast way to discharge an income tax debt that qualifies for discharge. You would very likely no longer owe the tax only about 4 months after filing a Chapter 7 case.

But Chapter 13 case could be much better for you than Chapter 7 for other reasons. Those other reasons may outweigh the benefit of discharging your dischargeable tax debt quickly.

You may owe some other income tax debt(s) which do not meet the conditions for discharge. These other taxes that may be too large to pay off reasonably through a monthly payment plan with the IRS/state.  The other taxes may not qualify for an Offer in Compromise or other settlement. You may well save money and avoid significant risks by handling all of your taxes in a Chapter 13 case.

There are also many other reasons that Chapter 13 would be worthwhile for you, reasons not involving income taxes. It may save your home from foreclosure or your vehicle(s) from repossession. Chapter 13 can deal with a child or spousal support arrearage much better than Chapter 7. There are many other situations where Chapter 13 gives you extraordinary and unique powers. So it can be worthwhile overall in spite of its disadvantages in dealing with a dischargeable tax debt.

How Does Chapter 13 Deal with Dischargeable Income Taxes?

Determining whether a particular income tax debt can be discharged in Chapter 13 is the same as in Chapter 7. Please see our last blog post for the conditions of discharge. These conditions mostly involve how long it’s been since the tax return for the tax at issue was due and when the return was actually submitted to the IRS/state. Sometimes there are other pertinent conditions, but usually it’s just a matter of timing.

Because of how the timing works, there are certain points of time in 2019 when a tax that hadn’t earlier qualified for discharge would then qualify. Again, see our last blog post about those crucial times happening this year.

If your tax does meet the conditions for discharge, it can get discharged in your Chapter 13 case. But this works quite differently than under Chapter 7.

One key difference is that under Chapter 13 there’s a good chance that you would pay something on your dischargeable tax debt.

Under Chapter 13 dischargeable income tax debts is treated like the rest of your “general unsecured” debts. Under your payment plan all such debts get paid the same percentage of their total amounts. That percentage may be any amount from 0% to 100% of their amount, depending on your budget and other factors.

Consider two situations: First, if you have a “0% plan” then you’d pay nothing on the dischargeable tax just like in a straightforward Chapter 7 case. Second, even if you do pay some percentage, often that actually doesn’t increase the amount you pay into your payment. We’ll explain these two situations.

A 0% Payment Plan

In some Chapter 13 cases all the money that the debtor can afford to pay goes to special creditors. All the money going into the Chapter 13 payment plan goes either to secured or to “priority” debts. These would include home mortgages, vehicle loans, nondischargeable taxes, child and spousal support, and such. These usually have to be paid in full before the “general unsecured” debts receive anything.  So during the 3-to-5-year payment plan no money goes to the dischargeable income taxes. That’s a 0% Chapter 13 plan.

Assuming the bankruptcy approves the plan, and you successfully complete it, at its conclusion the dischargeable taxes get discharged, without you having to pay any of it.

Payment Plans Which Do Not Increase the Amount You Pay

In many Chapter 13 plans the amount available for the pool of the “general unsecured” debts is a fixed amount. That amount is based on what you can afford to pay over the required length of the plan. (That required length is usually 3 or 5 years.) That fixed amount does not change regardless how much in “general unsecured” debts you owe. The amount just gets distributed to all those debts pro rata. The more you owe in “general unsecured” debts the lower the percent of the debts that fixed amount can pay.

For example, assume you can afford to pay the pool of “general unsecured” debts a total of $2,000 during the course of the payment plan. All the rest of the money you pay into the plan is earmarked for secured and “priority” debts. Assume also that you have $20,000 in unsecured credit card and medical debts and $5,000 of dischargeable income tax. Without the income tax, the $2,000 would be paid towards the $20,000 in “general unsecured” debts, resulting in a 10% plan. ($2,000 is 10% of $20,000.) Now when you add in the $5,000 tax, there’s a total of $25,000 of “general unsecured” debt. $2,000 is 8% of $25,000, resulting in an 8% plan.

You would be paying no more—the fixed amount of $2,000—over the length of your plan. The fact that you owe the $5,000 in dischargeable tax would not increase the amount you would pay. Then at the successful completion of the case all remaining “general unsecured” debts, including whatever was remaining on the dischargeable tax, would be forever discharged.

Conclusion

So you see that Chapter 13 is a slower and somewhat riskier way to discharge an income tax debt. Plus you may have to pay a portion of the tax instead of quickly discharging all of it under Chapter 7. But then again you may not have to pay anything on it, as described above. In any event, the delay and risks may well be worthwhile. Your bankruptcy lawyer will help you weigh all the advantages and disadvantages so that you can make the right choice.

 

The Surprising Benefits: Chapter 7 AFTER the Recording of an Income Tax Lien

August 6th, 2018 at 7:00 am

Under certain circumstances a recorded tax lien does NOT require you to pay a dischargeable tax after Chapter 7, or at least not in full.

 

The last two blog posts have been about the benefits of preventing an income tax lien recording by filing bankruptcy. That’s especially helpful if the tax at issue is an older one that can be discharged—legally written off. The recording of a tax lien can turn such a tax debt from one you don’t have to pay at all into one that you have to pay in full. (See the IRS Notice of Federal Tax Lien form.)

But what if the IRS or state has already recorded a tax lien against you, before you could file bankruptcy? You’re likely in even more financial distress after that tax lien recording than you were before. Could filing bankruptcy still help with that tax debt even after the lien recording?

Yes, both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” could help. They could each do so in different ways. And they could each help whether the tax at issue met the conditions for discharge or instead was a newer tax that did not.

Today’s blog post covers how Chapter 7 can help with a recorded tax lien on a dischargeable tax debt. We’ll cover how Chapter 13 helps in this same tax situation next week.

The Effect of a Tax Lien Recording

In most situations the recording of a tax lien on an otherwise dischargeable tax requires to pay that tax. Again, it turns a tax that you wouldn’t have had to pay into one you have to pay in full.

How does it do that? Basically, IRS’/state’s recording of a tax lien turns an unsecured debt into a secured one. The tax meets the conditions for discharge (mostly by being old enough), but the IRS/state now has rights over your assets. You have to pay the otherwise dischargeable tax if you don’t want to lose those assets.

What assets? Which of your assets would you lose after the recording of a tax lien if you didn’t pay the tax? That’s a crucial question. That’s because under certain circumstances you might not need to pay all the tax, even after a tax lien recording.  You might not have to pay any of the tax. It depends on which of your assets, if any, the tax lien attached to.

Assets Attached by the Tax Lien

Let’s be clear. Most of the time the recording of a tax lien results in you having to pay the tax. That’s because that tax lien attaches to your assets or property that you don’t want to lose. A recorded IRS Notice of Federal Tax Lien, for example, applies to “all property and rights to property belonging to this taxpayer for the amount of these taxes… .”  So if it applies to everything that belongs to you, you pay the tax to avoid losing those assets.

But sometimes the tax lien might attach to little, or even nothing, of value. Or what it attaches to is worth much less than the tax debt. Then you may not end up paying the whole tax debt amount, or even any of it. (See the IRS’ Guidelines for Processing Notice of Federal Tax Lien Documents, including about lien releases and withdrawals.)

Examples

For example, assume you owe $10,000 in old, dischargeable income taxes but own very little—say a total of $2,500 fair market value in household goods and personal effects. There’s a recorded tax lien on that $10,000 debt covering all your property. With a Chapter 7 case you discharge the $10,000 debt, but recorded tax lien on the $2,500 in property survives. The IRS/state has limited leverage in making you pay any more than $2,500. So there’s a good chance you could settle the matter by agreeing to pay around that amount.

Another example: the IRS/state has recorded a tax lien in your county real estate recorder’s office, placing a lien on your home. (Under many state’s laws that recorded lien would only apply to real estate, not to any other personal assets.) But what if you do not own a home or any other real estate in that county? What if you recently lost your home to foreclosure? Or what if your home has no equity at that time and likely won’t for many years? In these scenarios the IRS/state would have to concede that its lien is essentially worthless. Your bankruptcy lawyer may well be able to convince the IRS/state to release or withdraw its lien as being of no collection value.  

 

The Surprising Benefits: Break a Tax Payment Plan through Chapter 7

June 4th, 2018 at 7:00 am

Can’t afford your current IRS/state monthly payment plan? Have an upcoming additional new year of taxes to pay? Chapter 7 can often help.

Tax Installment Agreement You Can’t Afford

It’s a common problem. You owed income taxes a year or two ago when you sent in your tax returns. Money was very tight so you couldn’t just pay it off. You found out that the IRS let you pay that unpaid tax through a monthly installment plan. If you also owed state income taxes, you likely found out that your state taxing authority lets you do this, too.

So you set up the payment plan with the IRS and/or state. But your financial situation only got tighter because now you had a new monthly obligation you absolutely had to pay.  So now you are struggling to pay the monthly tax payment along with your living expenses and other debts. You wish there was a way to get out of your IRS/state monthly tax payment and other debts.

Tax Installment Agreement You Are About to Break

If you were desperate to have the money to pay the monthly tax payment (along with your other obligations), you may have arranged to withhold less from your paycheck during the current year. Or if you’re self-employed you may not have paid enough estimated quarterly taxes.

If so, you’ll likely owe income taxes again when your next tax returns are due. Assuming you couldn’t then immediately pay this new tax owed, this would likely be considered a breach of your current payment plan with the IRS/state.

At that point the IRS/state could terminate the monthly payment agreement. It could then take aggressive collection action against you, something you really want to avoid.

Or instead the IRS/state might let you roll the new tax owed into your current installment agreement. But that would likely result in an increased monthly payment. This only aggravates your problem of having more debt than you can handle.

Even if you could afford to pay an increased monthly tax installment payment, you’d be going backwards instead of making progress. The tax interest and penalties would add significantly to the amount you have to pay. You’re in vicious cycle and don’t see a way out of it.

Two Ways Out

But there ARE potentially two ways out: Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” We’ll cover Chapter 7 today; Chapter 13 next week.

Chapter 7 Discharge of Tax Debts

Which Chapter is better depends on many factors, but especially on whether your older income tax debts are “dischargeable.” This means whether the taxes can be legally, permanently written off in bankruptcy.

Some income taxes CAN be discharged. Basically, certain amounts of time must pass since the time the tax return for the tax was legally required to be submitted, and since the tax return was actually submitted. If you meet those conditions (and some other possibly relevant ones), the tax debt is dischargeable just like any ordinary debt.

When Chapter 7 Makes Sense

If ALL the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d not have to pay anything anymore on that monthly payment plan. If you anticipate owing new taxes with your next tax return(s), you could likely enter into a fresh monthly payment plan for these taxes. You wouldn’t end up breaching your present payment plan because you would no longer owe anything on it.

If SOME of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 may also make sense. You would no longer have to pay that part of your taxes, which would presumably reduce your monthly tax payments. If that reduced amount is one that you could afford—especially after discharging all or most of your other debts—Chapter 7 would help enough to justify using this tool.

If Chapter 7 Isn’t Good Enough

If you can’t discharge all your income taxes, or enough, through Chapter 7, consider Chapter 13 “adjustment of debts.” We’ll explain in our blog post next week.

 

What the IRS/State Can and Can’t Do After You File Bankruptcy

February 16th, 2018 at 8:00 am

Filing bankruptcy stops tax collection just like it stops other debt collection by more conventional creditors. But there are exceptions.  

 

The last several weeks of blog posts have been about bankruptcy’s “automatic stay” protection from creditor collections.  We’ve also gotten into many of the exceptions to that protection—when certain creditors CAN take certain actions.

Today we focus on some very limited exceptions to the automatic stay protection, those which apply specifically to income taxes. In bankruptcy you don’t want surprises, especially from a tax collector. These limited exceptions are reasonable. But it’ll still help you to understand them in order to not be surprised by them.

Tax Determination is Allowed, Tax Collection is Not

Simply put, the exceptions to the automatic stay protections are about determining the amount of tax owed. The IRS and the state tax authorities can take steps during bankruptcy to figure out how much you owe. They can make you do what the law requires along these lines. For example, they can require you to file your tax returns, regardless that you’ve filed bankruptcy. But then they can’t take any action beyond that to collect any taxes owed.

The IRS/State CAN’T. . .

The automatic stay immediately stops virtually all debt collection activity against you when you file bankruptcy. This protects you, your income, and your assets. Everything is put on hold so that the bankruptcy laws can be applied to your entire financial situation.

Debts that the law discharges—legally writes off—disappear. Other possible debts that the law does not discharge you continue to owe. With income taxes, if they’re old enough and meet other conditions, they’re discharged. Otherwise you’ll either owe them after completing the Chapter 7 case or you’ll pay them through the Chapter 13 case. But in the meantime the IRS and state are forbidden from collecting the debt. They are also forbidden to take any action directly related to collection, like recording a tax lien against your home or vehicle.

So to be clear, the automatic stay exceptions we’re discussing here do NOT allow the tax authorities to take any action to get your money or assets. The IRS and state tax authority can’t start or continue garnishing your paychecks or bank accounts. They can’t levy on (take away) anything else you own. They can’t call you to pay the tax, and can’t send you tax bills.

The IRS/State CAN. . .

As we said above, the taxing authorities can take certain specific steps to determine how much tax you owe. Some of these steps you wouldn’t expect your bankruptcy filing to affect—they’re probably not surprising. You filing bankruptcy does not prevent the IRS/state from doing the following:

  • Start or finish a tax audit “to determine tax liability.” (See Section 362(b)(9)(A) of the Bankruptcy Code.) But there can be no attempt to collect whatever that tax liability ends up being.
  • Send you a notice about the amount of tax that you owe—a “notice of tax deficiency.” (Section 362(b)(9)(B).) That notice is NOT a demand to pay the tax.
  • Demand that you file your tax returns. (Section 362(b)(9)(C).) In fact this step is often essential for the processing of your bankruptcy case.
  • Make an “assessment” of your taxes and issue a “notice and demand for payment.” (Section 362(b)(9)(D).) “Assessment” is a formal determination of the tax amount. The “demand” here is a term of art meaning that you are put on notice that you are obligated to pay the debt. But whether and when you really owe it usually depends on bankruptcy law.

Conclusion

The interplay between bankruptcy law and tax law can be quite complex. The rule of thumb is that bankruptcy stops tax collection but not tax determination. But your situation may have nuances that could make that rule of thumb misleading. If you are in the midst of, or fear, tax collections, be sure to see an experienced bankruptcy lawyer to find out what would happen in your unique situation. And it really does make sense to do so as early as possible. Tax debts are very much an area where early and wise planning could save you a lot of money.

 

Chapter 7 Permanently Prevents Tax Liens against Your Home

October 16th, 2017 at 7:00 am

Filing a Chapter 7 case prevents tax liens from hitting your home, and so avoids a dischargeable tax from turning into one you must pay. 

 

Our last blog post was about how filing a Chapter 7 case buys you time with debts on your home. It’s worth expanding on one of those Chapter 7 benefits, one that can go way beyond buying time. It could save you a lot of money, potentially many thousands of dollars.

The Dischargeable Income Tax Scenario

Filing a Chapter 7 bankruptcy can discharge certain, usually older, income tax debts. (See our blog post of this last September 22 about the conditions for writing off income taxes in bankruptcy.) If you file a Chapter 7 case before a tax lien is recorded on a dischargeable tax debt, then that will prevent the IRS or state tax authority from recording that lien against your home. The tax will then be discharged (permanently written off) about 4 months of your bankruptcy filing. After that the IRS/state can never record a lien or take any other collection action on the tax. It’s gone forever, and the threat of a lien against your home is also gone forever.

The Very Bad Alternative

What happens instead if the IRS or state records a lien against your home before you file bankruptcy?

Assume you’d have some equity in your home but no more than the homestead exemption. (That’s the amount of equity that’s protected from most creditors in bankruptcy—the specific amount varies state to state.) If you’d owe a tax debt that would qualify for discharge and the IRS/state had recorded a lien on that debt against your home, that lien would continue on after you’d complete your bankruptcy case. Your homestead exemption would not help with a tax lien. That lien would continue to encumber the equity you have in your home. You’d have to pay the lien in full when you’d sell or refinance your home. The lien would effectively turn a debt that you could have discharged within a few months after filing bankruptcy into an anchor attached to your home.

Assume instead that you’d have no equity in your home. The IRS/state would probably still want to keep its lien against your home. The lien would at the time have no equity to encumber but the lien would still attach to your title. Later the IRS/state could likely renew the lien, leaving it on your home’s title for a very long time. Odds are you’d be forced to pay the tax at some point, maybe when your home’s value increased enough. Instead of you getting the benefit of that equity, it would go to pay a tax that you could have discharged long before, if you’d just filed a bankruptcy case before the tax lien hit your home.

An Example

Let’s say you owe $6,000 in income tax for the 2012 tax year and $3,000 for the 2013 tax year. And this is after you’d paid monthly instalment payments for years. Those amounts include a lot of interest and tax penalties. Assume that both of these tax debts qualify for bankruptcy discharge. (This would mostly be because enough time has passed since their tax returns were due and actually submitted.) Assume also that you own a home worth $250,000 with a $225,000 mortgage. That $25,000 of equity is fully covered by your state’s $30,000 homestead exemption.

The following would happen if you filed a Chapter 7 case with your bankruptcy lawyer before any tax lien was recorded:

  • The “automatic stay” from the bankruptcy filing would immediately prevent the IRS/state from recording a tax lien on your home (or on anything else you own). Your home and its equity would be immediately protected.
  • Both the $6,000 2012 tax debt and the $3,000 2013 one would be discharged about 4 months later.
  • The IRS/state could never file a tax lien on these taxes ever again. They could take no further collection action of any sort. The $9,000 debt would be gone. The IRS’s/state’s ability to attach that debt to your home would be gone as well.

Instead the following would happen if the IRS/state HAD recorded tax liens on both years before you filed a Chapter 7 case:

  • The tax lien recorded against your home would continue on after you filed bankruptcy.
  • The IRS/state would get paid on those liens whenever you sold or refinanced your home, potentially many years later.
  • You would very likely pay $9,000—plus likely lots more interest and penalties—to the IRS/state that otherwise you would not have needed to pay.

 

Timing: Writing Off Income Taxes

September 22nd, 2017 at 7:00 am

Usually you can discharge—write off—an income tax debt by just waiting long enough. Here’s how to discharge a tax debt under Chapter 7.  

 

Timing is Just About Everything

If you owe an income tax debt and file a Chapter 7 “straight bankruptcy” case, one of two things will happen to that debt:

  1. It will be discharged—permanently written off—just like any medical bill or other ordinary debt, or else
  2. Nothing will happen to that tax debt; you’ll continue to owe it as if you hadn’t filed bankruptcy.

The difference, most of the time, is timing—when you file your Chapter 7 case.

The Timing Rules

In most situations a Chapter 7 case will discharge an income tax debt if you meet two timing conditions. The date you and your bankruptcy lawyer file that case must be both:

  1. at least 3 years after the tax return for that tax was due, and
  2. at least 2 years after that tax return was actually submitted to the IRS or state tax authority.  

See Sections 507(a)(8)(A)(i) and 523(a)(1)(B) of the U.S. Bankruptcy Code.

One important twist: IF you got an extension to file the applicable tax return, then the above 3-year waiting period doesn’t begin until the end of the extension. Section 507(a)(8)(A)(i). For example, let’s say you got a 6-month extension from April 15 to October 15 of the pertinent year. So then the 3-year period starts on that October 15 instead of on the usual April 15 return filing due date.

These Rules Applied

Assume you owe $7,500 in income taxes for the 2013 tax year. You’d asked for a 6-month extension to October 15, 2014. But then you didn’t actually submit the tax return until December 31, 2014.  

If you’d file a Chapter 7 case at any point before October 15, 2017, you’d continue owing the $7,500 tax. If you’d file on or after October 15 you would likely not owe a dime.

That’s because on October 15, 2017:

  1. At least 3 years would have passed since the extended due date of October 15, 2014, and ALSO
  2. At least 2 years would have passed since actually submitting the tax return on December 31, 2014.

Or, take with same $7,500 tax debt for the 2013 tax year with similar facts but a couple differences. You didn’t ask for an extension, but also didn’t submit the tax return until December 31, 2015.

Under these facts you’d have to wait until after December 31, 2017 to file the Chapter 7 case.

That’s because:

  1. 3 years since the tax return was due—on April 15, 2014—would have passed on April  15, 2017, but
  2. 2 years from the day the return was actually submitted would not pass until December 31, 2017.

Other Conditions

Earlier we said that “in most situations” Chapter 7 discharges income taxes debt when you meet the two timing conditions. So what are the other situations when taxes would not be discharged, even after meeting the 2-year and 3-year conditions?

There are two sets of them.

The first set comes into play if you made an “offer in compromise” to the IRS or state to settle the debt, or if you had filed a prior bankruptcy case involving this same tax debt. Since these are unusual situations, and the rules are detailed, talk with your bankruptcy lawyer if they apply to you.

The second set applies in situations in which the taxpayer “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” Section 523(a)(1)(C).  Different bankruptcy judges interpret this language differently. For example, is it a willful attempt to evade a tax to merely not submit its tax return when due, even if you submitted it voluntarily a year later? How about if you didn’t submit the tax return until the IRS personally contacted you to do so? Again, talk with your bankruptcy lawyer about how this part of the Bankruptcy Code is interpreted by your court. 

 

Including New Income Tax Debts in Chapter 13

November 14th, 2016 at 8:00 am

File your Chapter 13 “adjustment of debts” case at the right time to include all possible tax debts. Then budget right to prevent new ones.


Drastic Solutions for a Drastic Situation

Our last blog post was about what we called drastic solutions to a drastic change in circumstances. The changed circumstance was if a large new debt arises during your 3-to-5-year Chapter 13 case. Post-petition debts are those that arise after you file your case.

You can’t include post-petition debts within your Chapter 13 payment plan. You can’t discharge (write off) those debts. You can’t usually include them among the debts you are paying within your Chapter 13 plan.

New, post-petition debts during a Chapter 13 case can be a big problem because you’re in the middle of solving all your prior financial problems when you’re hit with a big new one. If the new debt is large enough, you can’t finish the Chapter 13 case that was resolving your old debts. So the drastic solutions involve throwing out the Chapter 13 case. Then you use a Chapter 7 case, or a new Chapter 13 one, to deal with both the prior debts and the new one.

But if you can, you want to avoid these solutions. They are drastic because they can be a real pain. You’ve put a lot of time, effort, and money at setting up a solution for your whole financial situation. Then you’ve put even more into making that solution work for many months and maybe even for a couple years. Then you have to start over when the new debt(s) hit you.

Avoiding the Drastic Situation with Income Taxes

If the new debt(s) come from a vehicle accident or a medical emergency, you can’t do much to avoid them. But you have some greater control over certain kinds of debts—upcoming income taxes, for example.

Once you are in the middle of a Chapter 13 case you and your bankruptcy lawyer can put your payment plan and your budget together to prevent future income tax debt. And you can file your Chapter 13 case at the right time so that all your income taxes are included.

Preventing Post-Petition Income Tax Debt

If you owe income taxes, there’s a good chance it’s because you didn’t have enough taxes withheld from your income.  Or if you’re self-employed or operate a business, you didn’t pay enough in quarterly estimated taxes. Especially if you owe for more than one year, you’ve probably have some entrenched bad habits along these lines.

Simply put, a carefully thought out Chapter 13 budget and payment plan will cure those bad habits. And they should do so relatively painlessly.

You likely didn’t withhold enough or pay enough in estimated taxes because you didn’t have the money to do so. It was going to pay debts, including maybe some older taxes. Chapter 13 usually drastically reduces the amount you pay each month towards your debts. That allows you to immediately increase the amount withheld for taxes on your paycheck. Or it frees up money for the quarterly estimated tax payments. So when it’s time to file your income tax returns from now on, you will not owe any new taxes.

So you won’t have any post-petition tax debt that could jeopardize your ongoing Chapter 13 case. And you’ll finally be out of the vicious income tax debt cycle.

Timing of Chapter 13 Filing to Include Upcoming Tax Debt

But that solution doesn’t work so well if you’re filing your Chapter 13 case well into the current tax year. By that time you may well have underwithheld, or underpaid estimated taxes, for most of the year. So if you file a Chapter 13 case now you could be setting it up for failure. When you do your tax returns a few months later you find out that you owe more taxes. But all your income would already be budgeted for expenses and your Chapter 13 plan payment, dealing with your past taxes and other debts. So you’d have no means to pay the new post-petition tax.

Often the best solution to this problem is to wait to file the Chapter 13 case until after the end of the tax year (after December 31 for those using the usual calendar tax year). That tax is considered legally owed as of then and would be included in your case. Prepare your tax returns right after filing so that you know how much you owe. Then this tax debt is incorporated into your Chapter 13 payment plan.

If you can’t wait until the start of the new year, consider the possibility of filing a partial-year tax return. You may be able to submit a tax return covering the time up until your Chapter 13 filing. That would include the taxes you owe up until that point, and that tax debt would be included in your case. Then you file another partial-year tax return after the end of the year covering the second part of the year. Since you’ve corrected the budgeting problem in your Chapter 13 case, you shouldn’t owe any more taxes.

Or If You Can’t Make the Tax a Post-Petition Debt…

Finally, if neither of these works for you, another possibility is to just file a Chapter 13 whenever you need to. With the help of a tax professional carefully calculate your current year tax debt amount as of that point. Then have your bankruptcy lawyer make room in your budget for installment payments on that tax when it becomes due later during your Chapter 13 case.

 

Everything to Know about the Automatic Stay

November 4th, 2016 at 7:00 am

During the last 13 blog posts we’ve covered the automatic stay—crucial protection that filing bankruptcy gives you. Here’s a helpful summary.

  

1. The Basic Protection

The automatic stay is the very strong legal protection from your creditors you receive when you file a bankruptcy case. The automatic stay stops virtually all attempts by creditors to collect their debts against you, your money, and your property. It goes into effect at the moment you or your lawyer files your bankruptcy case. (See Section 362(a) of the U.S. Bankruptcy Code.)

2. Relief from the Automatic Stay

Sometimes this protection is only temporary. Creditors have some say about whether the automatic stays in effect, its protection ends, or is modified. (See Section 362(d) of the Bankruptcy Code.) Most creditors which file motions for relief from stay are doing so to get permission to repossess collateral. Or they are trying to put conditions on the automatic stay to induce you to keep making your stream of payments on the collateral-secured debt.

3. Creditor Relief Not to Pursue Collateral

Creditors sometimes have reasons to ask for “relief from stay” that does not involve collateral on a debt.  It can be to ask for permission to finish resolving an ongoing dispute outside of bankruptcy court. Some reasons a creditor might ask for relief from stay are to:

  1. determine whether you are liable on the debt or claim at all
  2. calculate, if you are liable, the amount of your liability
  3. pursue insurance proceeds only
  4. determine the dischargeability of a debt outside the bankruptcy case
  5. get a bankruptcy court ruling about whether the creditor would be violating the automatic stay
  6. pursue a co-debtor (Section 1301)
  7. get permission to take other action not directly involving paying the debt

4. “Adequate Protection”

To keep possession of your property that is collateral on a secured debt, you need to give the creditor “adequate protection.” This generally involves 1) paying the creditor periodic (usually monthly) payments, 2) in an amount large enough to at least offset any reduction of the creditor’s interest in the property while you keep the property. (See Section 361.)

5. Exceptions of the Automatic Stay for Certain Creditors and Their Acts

a. Criminal Matters:

 Bankruptcy does not prevent a district attorney or other governmental authority from starting or continuing a criminal case against you. That includes any step of a criminal case: arrest, indictment, plea bargaining, trial, sentencing, appeal, and incarceration. The automatic stay simply does not apply to criminal matters. (See Section 362(b)(1).)

b. Family Court Proceedings:

Your ex-spouse, about-to-be ex-spouse, or somebody on his or her behalf, can start or continue the following limited proceedings:

  •  
    • to establish the paternity of a child
    • to establish or modify the amount of child or spousal support
    • to resolve issues of child custody or visitation
    • to address domestic violence

(See Section 362(b)(2)(A) of the Bankruptcy Code.)

c. Collection of Child and Spousal Support:

The automatic stay does not stop the collection of ongoing child or spousal support. Your ex-spouse or a support enforcement agency can continue to collect by any legal means. This is true no matter what kind of bankruptcy you file.

Besides ongoing support, Chapter 7 “straight bankruptcy” also does not stop the collection of unpaid and previously accrued support arrearage. This means that under Chapter 7 your ex-spouse/support enforcement agency can start or can continue collecting all forms of support through means that can often include:

  •  
    • wage withholdings
    • garnishment of bank accounts
    • seizure of a tax refunds
    • suspension of your driver’s licenses (both regular and occupational)
    • suspension of virtually all other licenses issued to you by the government, including occupational and professional licenses, and often including even hunting or other recreational licenses.

(See Section 362(b)(2)(B-D).)

d. The IRS and State Tax Authorities:

The IRS/state can take certain administrative actions related to DETERMINING the amount of tax you owe, but NOT to COLLECTING the tax. So, in spite of you filing bankruptcy, they can do the following:

  •  
    • Start or finish a tax audit “to determine tax liability.” (Section 362(b)(9)(A) of the Bankruptcy Code.)
    • Send you a notice about the amount of tax that you owe—a “notice of tax deficiency.” (Section 362(b)(9)(B).)
    • Demand that you file your tax returns, a legal requirement understandably not affected by your bankruptcy filing, and which indeed is often necessary to be able to administer your bankruptcy case. (Section 362(b)(9)(C).)
    • Make an “assessment” of your taxes and issue a “notice and demand for payment.” (Section 362(b)(9)(D).)
    • Under certain limited circumstances a tax lien can attach to your personal property and real estate. (Section 362(b)(9)(D).)

e. Residential Leases:

The automatic stay stops your landlord from taking away your right to your rental, for a period of time anyway. If your landlord has taken legal action to remove you from rental premises and has NOT yet gotten a judgment for possession of the premises, your bankruptcy filing will stop that proceeding and will stop the landlord from removing you. But an eviction is NOT stopped if the landlord “has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.” (Section 362(b)(22).)

f. “Endangerment of Property” and “Illegal Use of Controlled Substances”:

A residential landlord doesn’t necessarily need a judgment of possession. If it believes that you are either endangering the rental property or there’s an illegal used of a controlled substance on the property, it can certify this to the bankruptcy court. If you don’t object the landlord gets relief from stay to evict you. If you object and prevail, the automatic stay protection continues. (Section 362(b)(23).)

6. Losing the Automatic Stay through a Prior Bankruptcy Filing

You could you lose the automatic stay as to all of your creditors (not just one creditor filing a motion for relief from stay). That could happen if:

  • during the one-year period before filing a new case you were in a prior bankruptcy case; and
  • that prior case was “dismissed” (thrown out and/or closed before it was completed).

Then the automatic stay could altogether terminate 30 days after filing your new case.

However, the automatic stay would remain in force if within those 30 days you established with the bankruptcy court that your present bankruptcy case was filed in good faith. (Section 362(c)(3) of the Bankruptcy Code)

7. Lack of the Automatic Stay through Multiple Bankruptcy Filings

You could file bankruptcy and not receive the protection of the automatic stay from the beginning. That could happen if:

  • during the one-year period before filing a new case you were in two or more prior bankruptcy cases, and
  • those prior cases were “dismissed” (thrown out and/or closed before being completed).

Then the automatic stay “shall not go into effect upon the filing of the later case.”

However, the automatic stay would come into force once you established with the bankruptcy court that your present bankruptcy case was filed in good faith..” (Section 362(c)(4))

 

 

Dealing with a Recorded Income Tax Lien and Preventing Future Ones

July 15th, 2016 at 7:00 am

Chapter 7 sometimes doesn’t give much help with tax liens. But Chapter 13 hugely helps with tax liens already recorded, and stops new liens.

 

Today we cover the 5th of the 10 ways that Chapter 13 helps you keep your home, which we listed in a recent blog post. Here’s how we had introduced this one:

5. Protection from Both Previously Recorded and Future Income Tax Liens

Chapter 7 usually does nothing to address income tax liens that have already been recorded on your home. It also doesn’t prevent future tax liens on income taxes you continue to owe after the bankruptcy case is completed. In contrast, Chapter 13 provides an efficient and effective procedure for valuing, paying off, and securing release of tax liens. Plus, the IRS/state cannot record a tax lien on income taxes during the years while the Chapter 13 case is active.

Let’s show how this works in practice.

The Example

Assume that you own a home worth $215,000 with a mortgage loan balance of $210,000. The home value has been increasing modestly each year.

You tried to start a business at the beginning of 2012 which you couldn’t really get off the ground so you closed it down at the end of 2013. You worked part-time during those two years to have some income, and the business made some money. But the combined income was not nearly enough. As a result you didn’t have the money to pay estimated self-employment or withholding income taxes during those two years. And before, during and after that two-year period you racked up a bunch of credit card and other debt.

As a result you owe $8,000 in income taxes to the IRS for 2012 and $6,000 for 2013. You’ve filed all tax returns on time, don’t owe anything for 2014 and 2015, nor expect to for 2016. Your credit card and other non-mortgage debts now total $68,000.

You just received a notice that the IRS recorded a tax lien against your home on the $8,000 2012 tax debt. You are strapped, have used up all sources of credit and have fallen behind on some credit card payments. You can’t afford to pay anything to the IRS, and don’t know what to do.

Chapter 7 “Straight Bankruptcy” Not Sufficiently Helpful

At first it looks like a Chapter 7 case would solve many of your financial problems. The question is whether it would solve them adequately.

A Chapter 7 case would likely forever “discharge”—legally write off—all or most of the $68,000 in credit card and other miscellaneous debts. That would no doubt free up a fair amount of cash flow.

The 2012 income tax debt would have met the conditions for discharge (essentially, more than 2 years since the tax return was filed and more than 3 years since that tax return was due). But the new tax lien now recorded against and attached to your home would survive a Chapter 7 bankruptcy.

That means that the IRS can still force you to pay that $8,000 tax debt by sitting on the tax lien and maybe threatening to foreclose on your home. There’s currently only $5,000 in equity in the home ($215,000 value minus $210,000 mortgage), less than the amount of the tax lien. But that equity will likely increase as the home’s value increases and you pay down the mortgage. You will eventually have to pay the tax. In the meantime the tax lien will continue significantly hurting your credit.

On top of that, the $5,000 tax debt for 2013 would not yet meet the conditions for discharge. It’s not yet been 3 years since its April 2014 tax return due date. So you would continue owing that entire $5,000 tax debt. Plus the interest and penalties would just keep accruing. Then just as soon as your Chapter 7 case is completed the IRS would be able to use all of its usual collection powers. That includes recording a tax lien on this 2013 tax debt as well.

So a few month after your Chapter 7 case would be finished you would likely have two tax liens of $8,000 and $5,000 on your home, and have to figure out how to pay them off.

Chapter 13 Often Much Better

As we stated at the beginning, “Chapter 13 provides an efficient and effective procedure for valuing, paying off, and securing release of tax liens.” Here’s how that works.

In the example provided, you and your bankruptcy lawywer would propose a Chapter 13 payment plan that treats the 2012 tax debt as partially secured against your home and partially not secured. That $8,000 tax debt is secured to the extent of $5,000 (again, the $215,000 value minus $210,000 mortgage). The remaining $3,000 of that $8,000 would be declared by the court to be unsecured. That portion would be paid if, and only to the extent, that there was any leftover money to pay it during the course of the Chapter 13 case.

As for the $5,000 in 2013 income taxes, your Chapter 13 payment plan would have to earmark enough to pay that in full as an unsecured “priority” debt. But the interest and penalties would stop accruing, effectively reducing the amount that you’d have to pay. And you’d have a great deal of flexibility when and how it was paid. The payments would be based on your budget and worked around other important debts. And, in contrast to Chapter 7, and very importantly, the IRS would not be able to record a tax lien against your home during the course of your case.

At the successful completion of your case you would have paid off the secured port of the 2012 tax. And so that tax lien would be released. Whatever portion of the unsecured part of that tax would not have been paid would be discharged, along with any unpaid portion of the other $68,000 in debts. The 2013 priority debt would be paid in full. You’d owe no taxes. And other than the mortgage, you’d be altogether debt-free.

 

Preventing an Income Tax Lien on Your Home

May 23rd, 2016 at 7:00 am

The recording of an income tax lien turns your home into collateral on the tax you owe. Stop the IRS/state from getting that huge advantage.

 

Assume you owe an income tax debt of $20,000. Assume also that if you filed a bankruptcy case today that $20,000 would be “discharged”—legally written off—in bankruptcy since that tax meets the conditions for discharge. You would not have to pay a dime of this $20,000. Ever.

But now instead assume that you didn’t file bankruptcy today. Then tomorrow the IRS or state tax authority records a tax lien against your home on this $20,000 tax debt. This could mean that after that you could not discharge that debt at all but instead would have to pay it in full. Plus penalties and interest.

So, bankruptcy doesn’t just write off income taxes under the right circumstances. It prevents a debt that could be written off turning into one that can’t. And protects your home in the process.

A Bad Combination of Circumstances

So the recording of an income tax lien can turn a debt that can be discharged into one that has to be paid in full. This doesn’t always happen. It happens when you have a combination of 2 circumstances. But this combination of circumstances is a common one if you owe taxes:

  • First, the income tax you owe meets the conditions for it to be discharged in bankruptcy. A tax can generally be discharged if 1) more than 3 years have passed since the tax return for that tax was due, and 2) more than 2 years have passed since the tax return was actually submitted to the IRS/state.
  • Second, your home has equity to which a tax lien could attach.

Tax Liens Often Are Recorded Against Dischargeable Debts

The IRS and the state tax authorities don’t tend to record tax liens early in the collection process. Whether or not they do depends on the amount of the tax due and other factors. But they are often not quick on recording tax liens. They tend to go through other collection procedures first, especially if you cooperate with them (although again it depends on their individual procedures and how they exercise their discretion in each case).

Often the result is that by the time they would be recording a tax lien, enough time would have passed to meet the above 2-year and 3-year conditions for discharging that tax. So when a tax lien is recorded against you, that recording often turns a tax that could have been easily discharged into one that no longer can be.

A Tax Lien Attaches to ALL Present and to FUTURE Home Equity

Whether or not you own a home is a matter of public record. The IRS and state know if you own a home. They can determine, at least roughly, how much you owe on it. And so they know whether you have any equity in it and about how much. These facts can affect whether and when they would record a tax lien against your home.

You may think that you have little or no equity in your home. But consider the following:

  • First, you may have learned that you are entitled to a “homestead exemption” that protects the equity in your home from your creditors. You may have even learned that all of the equity that you have in your home is more than covered by that homestead exemption. Doesn’t matter. The homestead exemption does not have the power to stop a tax lien from attaching to your home equity.
  • Second, a tax lien attaches not just to your present equity but also to future equity. Your home equity increases as you pay down your mortgage and as the value of the home increases. If you are behind on property taxes, homeowners’ association dues, or other debts against your home, catching up on these builds equity all the more quickly. Tax liens can last a long time and so can attach to your home’s future equity. An IRS tax lien, for example, lasts the 10 years that it can collect on a tax (and can be extended in certain situations).
  • Third, even if you have little or no equity in your home and the equity won’t significantly increase in the future, a tax lien gives the IRS/state leverage to force you to pay them in order to get rid of the tax lien. Tax liens are quite damaging on your credit record. They can prevent you from selling or refinancing your home. The IRS/state will use all this to make you pay to get a release of its lien, even if the amount you are forced to pay is more than the amount of equity that the tax lien actually attaches to.

Preventing All This

Stop the IRS and state tax authorities from gaining all these damaging advantages. Do so simply by filing bankruptcy before they record a tax lien.

If you file either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” before a tax lien is recorded against you and your home, the IRS and/or state are stopped from recording one. Then, the IRS/state cannot record a tax lien during your bankruptcy case. And if the income tax(es) you owe meet(s) the conditions for discharge, towards the end of your Chapter 7 or 13 case the tax will be discharged. After that the IRS/state cannot take any action to collect the debt, including to record a tax lien.   

So, especially if you owe income taxes that meet the conditions for discharge, filing bankruptcy before a tax lien is recorded can make a tremendous difference.  The difference can be between paying NOTHING on a discharged tax debt and paying ALL of that tax because the lien attached to present and future equity in your home. 

 

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