Discharging Tax Debts in Chapter 7 Bankruptcy
May 22, 2010
Did you know some tax debts can be discharged in bankruptcy?
Bankruptcy filers can sometimes discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy. But, all of the following conditions must be met:
Tax return DUE at least three years ago.
To be dischargeable, the tax return must have been originally due at least three years before your bankruptcy filing date.
Tax return FILED at least two years ago.
At least two years prior to your bankruptcy filing date, you must have filed a tax return for the debt you are trying to discharge.
Tax ASSESSED at least 240 days prior to filing date, or not assessed yet.
The IRS must have assessed the debt at least 240 days prior to your bankruptcy filing date. Or, the tax must remain unassessed (by the IRS) as of your bankruptcy filing date.
In other words, you can’t discharge a tax liability during the 8 month period after the IRS assesses the tax. But, you can discharge the tax before the assessment happens and 8 months after the assessment.
Income taxes only.
Other kinds of taxes (such as payroll taxes or penalties for fraud) cannot be discharged in bankruptcy.
No fraud.
If you filed a fraudulent tax return, bankruptcy can’t discharge your tax liability.
You Can’t Discharge a Federal Tax Lien.
A Chapter 7 bankruptcy may be able to wipe out your personal liability for the tax debt. But, if the IRS has recorded a tax lien on your property, the lien will remain even after the bankruptcy. This means you’ll have to pay off the tax lien in order to sell the property.
The good news is discharging the tax liability will keep the IRS from being able to garnish your bank account or wages.
Chapter 7 Bankruptcy Timeline: From Filing Date to Discharge
April 11, 2010
A Chapter 7 bankruptcy typically takes 3-4 months from filing date to discharge date. This post discusses what happens during that time.
Bankruptcy events
Notices from the court: You will receive several notices from the court by mail.
Your meeting of the Creditors: Your will receive a notice from the court telling you the date and time of your Meeting of the Creditors (also called a 341 Meeting.) It is very important that you attend this meeting.
Financial management course: You will need to complete a financial management course within 45 days after your Meeting of the Creditors. This course can be completed online.
Final discharge papers: About 80-90 days after your Meeting of the Creditors, you will receive your final bankruptcy discharge papers. Please save these papers. If creditors later try to collect on a debt you included in the bankruptcy, you will need to show the creditor your bankruptcy discharge papers to prove that you no longer owe the debt.
Debts and expenses while you are in bankruptcy
Unsecured debt payments: You will stop making payments on the unsecured debts that were included in your bankruptcy.
Secured debt payments: It is very important to stay current on your secured debt payments while you are in bankruptcy. If you fall behind, the creditor will ask the court for permission to proceed with foreclosure or repossession.
Automatic debits and electronic payments: You will not be able to pay your secured debts using automated debit or electronic payment. Plan to pay your secured debt payments by check.
Selling assets: You will not be able to sell any of the assets in your bankruptcy estate without the permission of of the trustee.
“New” debts: Debts you incur after your filing date are not discharged by the bankruptcy. In other words, you will still be liable for paying those debts.
Expenditures: During the time your case is in progress, you will need to limit your expenditures to reasonable living expenses only.
Significant changes in your financial situation: You must notify the Trustee if you win the lottery, come into an inheritance, or have any other significant change in your financial position while your case is in bankruptcy and for six months after your bankruptcy discharge.
Creditor contacts, debt lawsuits, and garnishments while you are in bankruptcy
The automatic stay: The automatic stay goes into effect when you file. The automatic stay is the court order that tells creditors and debt collectors to stop contacting you.
Creditor contacts: If creditors contact you, this is a violation of the automatic stay. Make notes of the name and contact information of any creditors contacting you. Notify your attorney of any creditor contacts.
Pending debt lawsuits: If you have any pending debt collection lawsuits, they will be suspended while you are in bankruptcy.
If you successfully complete the bankruptcy, the cases will be terminated. If you do not successfully complete the bankruptcy, the cases will be re-activated.
Court cases not related to your debts will be affected differently. Be sure to discuss with your attorney the effects the bankruptcy will have on any court cases you have pending.
Garnishments: Most garnishments will be terminated when you file bankruptcy.
Filing for Bankruptcy: How Should I Organize and Send My Supporting Documents?
March 5, 2010
In order to fill out your bankruptcy paperwork, you will need to refer to the documents included in this list.
Additionally, you will need to submit copies of these documents to our office. The steps below will make this process much easier.
(1) Copies only, please
VERY IMPORTANT: Please do not send original documents to our office. Please send copies.
(2) Delivery methods
You can email pdf copies (preferred), fax, mail, or drop off your documents in person.
(3) Separate stacks for each bill type
When you submit paper copies, please arrange them by type of bill.
Example: you would group all your power bills together in one stack and paper clip them together. You would group all your gas bills together in a separate stack and paper clip them together.
(4)Â Please use paper clips
Please use clips to hold your stacks of bills together. We will scan them into our computer system, so it makes it easier if the copies are not stapled.
(5)Â Include all months
Please check to be sure all required months are included.
Example: If you file bankruptcy in July, please check to be sure you have included each month’s bill for January – June.
(6) PDF copies are better, faster, and cheaper
It is much easier to email our office pdf copies than it is to fax or mail paper copies. Most billing statements and bank statements are available online in pdf format.
Separate emails: If you send .pdf copies, please send a separate email for each type of bill and please label the subject line.
Example: you would attach you January – June Visa Card billing .pdfs to one email and put “Visa bills” on the subject line.
In a separate email, you would attach your January – June American Express bills and put “American Express bills” on the subject line of that email.
(7)Â Label “mystery” documents
For any paper copy documents you need to submit, please label the document to let us know what it is (if it is not obvious.)
(8) Use a check list
Please print out this list and check off each item after you have submitted the item to our office. That way, you will not overlook any documents you need to submit.
Gathering supporting documents is often the longest part of the bankruptcy filing process. Using the steps above will make it a much faster and less stressful experience.
Chapter 7 Bankruptcy Timeline: From Consultation to Filing
March 2, 2010
This post explains our office’s procedures when we help a Client file for bankruptcy.
We provide a free consultation and case review as described below.
Our goal is to make the filing process as fast, convenient, and efficient as possible for our Clients. Many steps can be completed online or by phone.
Step 1:Â Free Phone Consultation
Please call 202-470-2727 for a free bankruptcy phone consultation.
During the phone consultation, we ask some general questions about your situation to determine whether bankruptcy might be able to help you.
If it seems bankruptcy might be able to help, we will ask you to complete some additional information online.
Step 2:Â Complete Free Questionnaires (Online or Paper Copy)
Once we’ve determined whether bankruptcy can help, we need to take a closer look at your situation to be sure bankruptcy is the best option for you.
To get the information we need, we ask you to fill out detailed questionnaires. We can provide these to you online or as a paper copy. This is included in our free consultation process.
You will not need to complete this information again if you decide to hire our office to help you file bankruptcy. We will transfer the information directly to your bankruptcy paperwork.
Step 3: Office Meeting / Hiring Our Office
If you decide to proceed with filing bankruptcy, we will ask you to come into the office to meet us, sign a Representation Agreement, and pay a deposit.
Step 4:Â Provide Supporting Documentation / Research Legal Issues
After signing the Representation Agreement, you will provide supporting documents from this list.
This post gives some helpful information about the process of providing supporting documents.
At this stage, we will also research any legal issues presented by your bankruptcy filing.
Step 5: Complete All Tax Returns
If you have unfiled tax returns for previous years, you will need to file them.
You might receive refunds. These refunds need to be exempted when we prepare your bankruptcy paperwork. Otherwise, the Trustee may intercept the refunds and give them to your creditors.
Please plan to complete the previous year’s return even if it’s January – April 15 and the return isn’t yet officially due.
Step 6: Credit Counseling
You must complete a credit counseling course online, by phone, or in person prior to filing your bankruptcy case.
We recommend Hummingbird Credit Counseling and Education, but you can use any Trustee-approved service.
Step 7:Â Pay Remaining Attorney’s Fees and Court Filing Fees
Your representation agreement will specify your attorney’s fees. These fees will vary depending on how complex your case is.
Prior to your case filing, you will pay the balance of your Attorney’s fees and court filing fees.
VERY IMPORTANT: Your court filing fees are SEPARATE from your attorney’s fees. Court filing fees are $299.00.
Step 8:Â Credit reports
We will pull your credit reports to review it for creditors you may have overlooked when you completed your original questionnaires.
We will ask you to complete this form to authorize us to pull your reports.
Step 9:Â Other Public Records
We review public record information to check for any additional debt issues.
Step 10: We prepare your bankruptcy paperwork.
The attorney reviews all your supporting documentation and prepares and files your bankruptcy paperwork.
Chapter 13 Bankruptcy: How is my Repayment Plan Calculated?
February 20, 2010
Overview
Chapter 13 bankruptcy generally lets you keep most or all of your assets and requires you to repay some of your debts over a 3-5 year period. But, how do you determine how much you have to pay and for how long?
Your repayment plan: what is it?
Your repayment plan is a document that describes in detail (1) how you plan to repay your debts and (2) how much you propose to pay.
You submit your plan to the bankruptcy court for approval. The plan must be “confirmed” by a bankruptcy judge. He or she will will review your plan to be sure it complies with Chapter 13 requirements and is feasible considering your economic situation.
Your repayment plan: what debts are included?
Your plan must explain how you propose to satisfy the following requirements.
Priority debts. Your Chapter 13 plan must pay certain debts in full. These debts are called “priority debts” and include back wages you owe to employees, child support and alimony, and some tax debts.
Secured debts. In addition to paying priority debts, your plan amount must also cover your regular payments on secured debts, such as a car loan or mortgage. The plan must also allow you to pay any past due amounts on your secured debts.
Unsecured debts. The plan must show that any “disposable income” you have after paying priority and secured debts (described above) will go towards paying some of your unsecured debts. Your disposable income is calculated using a formula set by the bankruptcy court.
You usually don’t have to repay unsecured debts in full. But your plan must show that you are putting any remaining disposable income towards their repayment.
And, if you have a lot of assets that would be subject to seizure by the trustee if you had (hypothetically) filed Chapter 7 bankruptcy, then the amount you must pay towards your unsecured debt might be higher.
Your repayment plan:Â how long does it last?
The length of your repayment plan depends on a number of factors, including how much you earn and the amount of your debts.
If your average monthly income over the six months prior to your bankruptcy filing date is more than the median income for your state, you will need to propose a five-year plan.
If your income is lower than the median, you may propose a three-year plan.
Chapter 13 Bankruptcy: What is it and How Does it Work?
February 17, 2010
What is a Chapter 13 bankruptcy?
Chapter 13 bankruptcy is sometimes called “payment plan bankruptcy.”
In a Chapter 13, a person with regular income proposes a plan to repay some or all of his or her debts over a three to five year period.
The amount of debt the person must pay back depends on many factors, including the person’s income, total debt, and living expenses.
A Chapter 13 bankruptcy (1) lets consumers keep their assets and (2) gives them time to catch up on debt payments while under the protection of what is called the “automatic stay.”
The automatic stay prevents creditors or debt collectors from trying to collect while a person is under the protection of the bankruptcy court. The automatic stay prevents or stops most foreclosures, car repossessions, and debt lawsuits.
Will my debts be wiped out?
If you file Chapter 13 bankruptcy, you will have to pay back some of your debts. But, at the end of the payment plan, any remaining unsecured debt is wiped out.
Can I keep my assets in a Chapter 13 bankruptcy?
In a Chapter 13 bankruptcy, you usually don’t have to give up your assets, but you must pay some or all of your debts.
This is very different from a Chapter 7 bankruptcy, in which most of your debts are wiped out, but you might be required to give up assets that aren’t covered by your bankruptcy exemptions.
Do I need income to qualify for Chapter 13 bankruptcy?
People filing Chapter 13 bankruptcy must have regular income of a certain minimum amount. The required income amount depends on the amount of your debts, your living expenses, and several other factors.
If your income is irregular or too low, you might not be eligible to file a Chapter 13 bankruptcy. But, you might qualify for relief under Chapter 7.
Can I have too much debt to qualify for Chapter 13?
Yes. There are limits to how much secured debt you can have, and how much unsecured debt you can have. If your debts exceed these amounts, you will not qualify for Chapter 13. (But, you might qualify for bankruptcy relief under another chapter.)
A “secured debt” is a debt that is tied to property (such as your house or car) that the creditor can take back if you don’t pay the debt.
An “unsecured debt” is debt that is not tied to property that can be taken back by the creditor. Examples of unsecured debt include medical bills and most credit cards.
Continue reading “How is my Chapter 13 Bankruptcy Repayment Plan Calculated?”
How does Bankruptcy Affect a Security Clearance?
January 21, 2010
Many people living in the greater Washington, D.C. area are required by their employers to maintain security clearances. But what happens to a person’s security clearance if he or she files for bankruptcy?
The bankruptcy code generally prohibits an employer from discriminating against an employee if he or she files for bankruptcy. But, a change in security clearance may or may not qualify as “employment discrimination,” depending on the circumstances.
Although the evidence is anecdotal, a bankruptcy filing alone does not appear to cause an automatic revocation of most security clearances.
Some security officers report that a bankruptcy filing is seen as a positive step if a person has a large amount of debt they were previously ignoring.
In other words, it’s the debt that renders a person with a security clearance vulnerable to being compromised. Bankruptcy helps get rid of the problematic debt.
In fact, I have spoken to people who were counseled by their security officers to file bankruptcy because their debts were too large and seemed to pose a security risk.
However, your security officer will also consider other factors such as how you got into debt and what you did to try to resolve the debt prior to filing bankruptcy. You may want to visit this site for more information about how certain security clearance reviews are conducted.
The only way to be sure how a bankruptcy will affect your particular security clearance is to discuss it with your security officer and chain of command, if applicable.
Chapter 7 Bankruptcy: Mortgage Reaffirmations and Modifications, Part II
October 16, 2009
Here is more information on reaffirmation of mortgages in bankruptcy, including implications for modifications. The linked article was written by Orlando, Florida bankruptcy attorney Jonathan Alper.
Mortgage Companies Refusing Loan Modifications to Some Chapter 7 Debtors
Chapter 7 Bankruptcy: Mortgage Reaffirmation and Mortgage Modification, Including HAMP
September 20, 2009
We get a lot of questions about whether homeowners should reaffirm their mortgages DURING a Chapter 7 bankruptcy.
(Note:Â reaffirming a mortgage AFTER a bankruptcy is completed / the filer receives his or her discharge is technically not authorized by the bankruptcy code.)
Many lenders tell homeowners their mortgage documents require them to reaffirm if they file for Chapter 7 bankruptcy. This may or may not accurate, and you would need to consult your loan documents to be sure.
Some servicers require homeowers to reaffirm their mortgage before they will consider them for a mortgage modification. This complicates the reaffirmation analysis for reasons discussed below.
But, first let’s back up a bit and discuss reaffirmation and secured debt in general.
Secured debt in bankruptcy
Secured debt such as a mortgage includes two components:Â you are personally liable for paying the debt, AND the collateral (your house, in the case of a mortgage) can be taken away if you don’t pay.
A Chapter 7 bankruptcy generally relieves homeowners of personal liability for paying their mortgage.
But, the lender retains the second “part” of the debt– the right to foreclose if you don’t make mortgage payments.
Reaffirmation of a mortgage:Â what is it?
When you sign a reaffirmation agreement, you agree to remain personally liable on the mortgage after your bankruptcy. Your bankruptcy would otherwise relieve you of this personal liability. More below on why this is significant, but suffice it to say reaffirming your mortgage in a Chapter 7 bankruptcy can be a very bad idea.
Doesn’t the 2005 bankruptcy law require me to reaffirm?
Technically, the 2005 BAPCPA changes to the Bankruptcy Code force debtors to choose between reaffirming a secured loan DURING the bankruptcy or surrendering the collateral.
But, this applies only to secured personal property (example:Â cars.)Â It does not apply to real property.
Deficiency judgments
So, what’s the significance of being relieved of personal responsibility for paying the mortgage if your lender can still foreclose on you? Two words: deficiency judgments.
What is a deficiency judgment?
Let’s say your lender forecloses and sells your house for $200,000, but you owed $300,00 on it. That extra $100,00 is called a “deficiency.”
The lender can theoretically sue you personally for the deficiency if (1) you live in a state where deficiency judgments are available and (2)Â you have not discharged personal responsibility for the debt in bankruptcy.
Although it’s rare, some lenders will try to get deficiency judgments even in cases of short sales or deed in lieu transactions– even though the lender is a willing participant to those transactions. So, read the fine print of your short sale and deed in lieu documents!
On the other hand, some lenders decline to pursue deficiency judgments at all, even in cases of foreclosure. Practices vary widely, so as always you should discuss this with your specific lender and / or mortgage servicer.
How does a bankruptcy discharge affect deficiency judgments?
If you (1) filed bankruptcy, (2)Â did NOT reaffirm your mortgage and (3) received a discharge, you are likely relieved of personal liability for the mortgage.
In that case, you cannot be sued personally for any deficiency after a foreclosure sale, short sale, or deed in lieu transaction.
If the deficiency judgment was entered against you BEFORE you filed for bankruptcy, you will need to take extra steps in your bankruptcy filing to be sure you are relieved of personal responsiblity for paying the judgment. If the judgment has been reduced to a lien on other property you own, other procedures apply. These scenarios are beyond the scope of this post.
Where are deficiency judgments available?
Check your state’s laws to find out if deficiency judgments on mortgages are available in your state. They are available in Maryland and D.C.
Is it ever a good idea to reaffirm?
In light of the above, it is ever a good idea to reaffirm?
Obviously, if the bankruptcy court tells you to reaffirm or else surrender your house, you will need to consider reaffirming. But, you should also consider whether surrendering the house makes more sense.
And, some mortgage servicers refuse to consider a homeowner for mortgage modification (including HAMP modifications) unless the homeowner reaffirms.
Generally, a homeower should NOT consider reaffirming until he or she has a firm, written modification offer in writing specifying all terms– including the interest rate.
Otherwise you could reaffirm but never actually receive a modification offer. You then would have signed up for personal liability and gotten nothing in return.
Be prepared for a “chicken or egg” problem, however. Considering servicers’ seeming reluctance to process modifications, it can be difficult to get them to produce the modification paperwork before they have everything they want– including the reaffirmation.
Don’t let this deter you from requesting a modification, however. Homeowners have reported some servicers did not even raise the issue of reaffirmation when they applied for a post-bankruptcy modification. (And the homeowners, perhaps wisely, did not “remind” the servicers about the bankruptcy discharge.)
This may just be because the servicers are disorganized. Or, maybe servicers have started to realize it is in their best interest to modify.
What Happens to my HAMP Modification if I File for Bankruptcy?
September 6, 2009
Many homeowners sought HAMP modifications because they thought it would help them avoid bankruptcy. But, mortgage servicers are not processing HAMP mortgage modifications nearly quickly enough to offer any real relief to homeowners. With servicers refusing to even acknowledge receipt of modification documents, what now?
Many homeowners applied for HAMP modifications four or five months ago and were current on their mortgages when they first applied. Had they received a timely response to their modification requests, many could have avoided bankruptcy.
But, homeowners are not receiving timely responses from their servicers. In the meantime, their debt situation becomes more and more dire as they struggle to remain current on their mortgages pending a response to their modification requests.
So, the question becomes:Â will filing for bankruptcy take these homeowners out of the running for a HAMP modification (assuming their servicer ever decides to process their HAMP application)?
Homeowner has applied for HAMP but not yet in trial period
If the homeowner has applied for HAMP but is not yet in a trial period, it is generally left up to the discretion of the servicer as to whether they will consider a homeowner eligible for a HAMP modification after filing bankruptcy.
If, however, your loan is owned or guaranteed by Fannie Mae or Freddie Mac, new rules may soon make it mandatory for your servicer to offer you a HAMP modification even if you declare bankruptcy. (This is assuming you otherwise qualify for a HAMP modification.) Note: these changes have been proposed, but have not yet taken effect.
In our experience, some servicers decline to offer HAMP modifications to homeowners who have filed for bankruptcy prior to entering the HAMP trial period.
But, homeowners in this situation should ask their servicer about its policy.
If you servicer will not offer you a modification if you file for bankruptcy, you can crunch the numbers to determine whether you would get more relief from a modification or a bankruptcy filing.
What if you are in your HAMP trial period and you need to file for bankruptcy?
If you have already entered a HAMP modification trial period and you file for bankruptcy, the final modification may need to be approved by the bankruptcy court.
The servicer is generally required by the HAMP servicer guidelines to work with your bankruptcy attorney to try to get the modification approved by the bankruptcy court, if necessary.
What if your HAMP modification is in place but you still need to file bankruptcy?
A homeowner’s filing bankruptcy after a HAMP modification might be considered a violation of the modification plan.
Homeowners who think they might need to file bankruptcy even after getting a modification should ask their servicer if a bankruptcy filing will void the modification.
Many of these are gray areas and servicer policies vary widely. Homeowners should always check with their specific servicer as to what its policy might be. But, it’s important to ask the questions.
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