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Timing Your Bankruptcy

July 13th, 2020 at 7:00 am

The timing of your bankruptcy case is important, sometimes extremely important. It can determine if your case is as successful as it can be.

 

Five weeks ago we started a series on why you should get legal advice from a bankruptcy lawyer. We’ve also been making a point of showing why it’s smart to do so early, when you start considering bankruptcy.

It’s super important to get this legal advice so that you can learn:

  1. if bankruptcy is the best option for you, and how to pursue other alternatives
  2. how Chapter 7, 11, 12, and 13 work, and whether either are right for you
  3. what actions you should take to position yourself, whether you’re possibly or definitely filing bankruptcy
  4. what you should avoid doing
  5. the best timing for your bankruptcy filing

If you want to look back, we covered #1 and #2 five weeks ago. The next four blog posts got into different aspects of what you should and shouldn’t be doing before filing (#3 and #4). These included keeping assets (4 weeks ago), taking on debt (3 weeks ago), filing income tax returns and paying the taxes (2 weeks ago), and paying child/spousal support (1 week ago).

Today we start on how to best time the filing of your bankruptcy case.

Bankruptcy Timing

Frankly, this is a huge topic. That’s because so much our financial lives are tied to time. One day you don’t owe a debt. The next day you go to a medical appointment and immediately owe a debt to the doctor’s office. You get the bill with a due date (after insurance pays a portion, if you’re fortunate enough to have insurance). If you can’t pay it by the due date, the debt goes into collections at some point in time. Then at some point you get sued, which turns—a certain amount of time later—into a judgment against you. After a short period of time (usually), that turns into a garnishment of your paycheck. All of these steps involve timing, with deadlines and time-based events.

Similarly, bankruptcy involves many issues of timing. Using the example above, filing bankruptcy stops the debt collection process wherever it is at the time.  If a lawsuit has been filed by the collector but no judgment yet entered, bankruptcy stops the entry of a judgment. If a judgment has been entered but no garnishment yet ordered, bankruptcy filing at that time prevents the garnishment. If your wages are the midst of being garnished, bankruptcy stops the garnishment. Whether it stops your current paycheck from being garnished or the next one, it all depends on timing.

Important Examples of Good (and Bad) Timing

The timing of your bankruptcy filing can affect all of the following. Whether:

  1. the bankruptcy case includes recent or ongoing debts or not
  2. you have to pay an income tax in full, in part, or not at all
  3. you must pay interest on an income tax because of a tax lien
  4. you can discharge (legally write off) a credit card debt, or a portion of it
  5. you can discharge a student loan debt
  6. you qualify for a vehicle loan cramdown—reducing monthly payments, interest rate, and total debt—and still keep the vehicle
  7. you qualify for a personal property collateral cramdown—paying less—and still keep the collateral
  8. you stop the repossession of your vehicle in time, or lose it to the vehicle loan creditor
  9. you prevent the foreclosure of your home in time, enabling you to catch up over time
  10. you get more time to sell your home, including years from now
  11. you qualify for a Chapter 7 case under the “means test,” or must instead file under Chapter 13
  12. you qualify for a 3-year Chapter 13 payment plan or instead must pay for 5 years
  13. your sale or gifting an asset is a “fraudulent transfer
  14. your payment to a friendly creditor is a “preference
  15. you can keep all of your assets if you’ve moved from one state to another in the past several years

Conclusion

Just looking down this list gives you a better idea how important the timing of your bankruptcy can be. We’ll be covering these timing issues one-by-one in our next blog posts. There’s a good chance that one, or even a number of them, apply to you. If any do, and you need to know more about it, please call us. We would appreciate being your bankruptcy lawyers, helping you fully  benefit from the law.

 

Filing Bankruptcy in 2019 to Write Off More Income Taxes

January 7th, 2019 at 8:00 am

With smart timing you can discharge—legally and permanently write off—more income tax debts, even with a standard Chapter 7 case. 

 

The right timing of the filing of a bankruptcy case can make a tremendous difference. Our last 8 blog posts have all been about smart timing. If you need to use the bankruptcy laws to get relief from your creditors, it’s only sensible to get as much relief as the laws can give you by timing it right.

The discharge of income tax debts is particularly timing sensitive.

How Chapter 7 and Chapter 13 Conquer Income Tax Debts

Filing bankruptcy with smart timing in 2019 conquers your income tax debts in two main ways:

  • Discharge (legally write off) more of your tax debts (likely for the 2015 tax year). This applies to both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”
  • Include any taxes owed for the 2018 tax year in your Chapter 13 payment plan. This gives you huge advantages.

Today we’ll show the first part—how to discharge more income taxes in 2019 with a Chapter 7 case. We’ll cover the Chapter 13 aspects in the next two weeks.

Is Chapter 7 “Straight Bankruptcy” Good Enough?

You may be surprised that income tax debts can be discharged under Chapter 7 just like most other debts. They are discharged just as completely as a medical bill or credit card balance. You just need to time it right. You do also need to meet some other conditions. But much of the time those other conditions are met rather easily.

What’s the easiest way to deal with a tax debt?  You may have heard that the more complicated Chapter 13 is better if you owe income taxes. That’s often true, especially if you owe for multiple years and/or for more recent tax years.

However, under the following circumstances Chapter 7 is likely better:

  • All of the income taxes you owe qualify for discharge
  • Some but not all of your income taxes qualify for discharge, but you can handle the rest either through:

The main advantage with Chapter 7 is speed. An income tax that qualifies will be forever discharged. This will usually happen about 4 months after you file your Chapter 7 case. Your whole case will, in most situations, be fully completed at that point. You can get on with your life. In contrast, a Chapter 13 case usually takes at least 3 years and can stretch as long as 5.

Discharge More Income Tax under Chapter 7

There are two main timing conditions for discharging income taxes through Chapter 7. The day that your bankruptcy lawyer files the case must be both:

1) at least 3 years past when the applicable tax return was due, adding any time for extensions to submit the return (Section 507(a)(8)(A)(i) of the U.S. Bankruptcy Code.)

2) at least 2 years past when the tax return was actually submitted to the IRS or state tax agency (Section 523(a)(1) of the Bankruptcy Code.)

Again, there are other conditions. Some involve timing, such as additional time added if you’ve made an offer in compromise on that tax, or filed a prior bankruptcy. (Section 507(a)(8)(A)(ii).) The other main condition is if you “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” (Section 523(a)(1)(C).) A recorded tax lien on the tax would add some additional complications. But these additional conditions often don’t apply. If you ARE concerned that any might apply to you, tell your lawyer early in your first meeting.

Applied to Income Tax Owed for 2015

Let’s apply this to a tax debt for the 2015 tax year.

If you owe income taxes for 2015, when would you meet the first of the two main timing conditions? The 2015 tax return was due April 15, 2016. So you need to file your Chapter 7 case 3 years after that, after April 15, 2019. So then the required 3 years will have passed since that tax return was due.

This assumes you didn’t get a tax return filing extension. What happens if you did? That year the standard extension to October 15, 2016 fell on a Saturday. So the extended deadline would have actually been Monday, October 17, 2016. (As you can see, these kinds of minor-seeming details can be crucial.)  So if you got this extension you’d have to file your Chapter 7 case after October 17, 2019.

How about the second of the above two conditions? When did you submit your 2015 tax return(s) to the IRS/state? You have to make sure at least 2 years have passed since you’d submitted it/them. If submitted by either the regular due date of April 15, 2016 or the extended date of October 17, 2016, then you’ve already met this 2-year condition (as of the writing of this blog post). If you submitted the return(s) any later, you have to make sure that you meet this 2-year condition.

An Example

Assume that you:

  • owed $7,000 to the IRS for 2015 income taxes
  • submitted that tax return to the IRS on or before April 15, 2016 without an extension
  • did not pursue an Offer in Compromise or file an interim bankruptcy case, or if you did the resulting additional time has passed
  • the tax return was not fraudulent and you didn’t “willfully attempt” “to evade or defeat” the tax

If you now file a Chapter 7 case after April 15, 2019, this $7,000 tax debt would almost certainly be completely discharged within 4 months of filing. If you file before then this tax debt would not be discharged. See a competent bankruptcy lawyer as soon as possible to determine what’s best for you regardless.

 

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