Discharging Taxes in Bankruptcy

Question: I owe $40,000 in back taxes. Can these be discharged in bankruptcy? Also, I have applied for an extension on filing my 2008 tax return. Should I file the return before filing bankruptcy, or does it matter?

Answer: On your bankruptcy petition, creditors are listed as holding secured claims, unsecured priority claims, and unsecured nonpriority claims. Whether or not your taxes can be discharged will depend on where they must be listed and under which chapter you file. A creditor’s claim is a debt that you are alleged to owe.

Secured claims must be paid in their entirety. These claims would include taxes for which a lien has been placed on your real property. If, however, the lien impairs an exemption to which you are otherwise entitled your attorney may be able to avoid the lien,

Unsecured priority claims must be paid in their entirety under Chapter 7. These debts are dischargeable under a Chapter 13 full compliance discharge. A full compliance discharge occurs when you complete all plan payments, even if your Chapter 13 plan calls for less than 100% payment of priority claims. A full compliance discharge eliminates debts incurred to pay nondischargeable federal, state or local taxes. 11 USC § 523(a)(14). Government fines, penalties and forfeitures are also dischargeable under a full compliance discharge, excluding criminal fines under § 1328(a)(3).

Unsecured nonpriority claims must be paid at least to the value of your nonexempt property. In a Chapter 7 liquidation bankruptcy some of your assets will be exempt from being sold to pay your creditors. For example, there is presently a $525 exemption for each item of personal property. If you have a sofa that is worth $400 the sofa will be exempt. If the sofa is worth $900 then $525 will be exempt property and $375 will be nonexempt property. Unless, there is another statute to exempt the full value of the sofa at least $375 must be paid to creditors. The court is not concerned with whether you sell your sofa to acquire this amount or find the money elsewhere. The value of all your nonexempt property is what you will be required to pay your unsecured creditors under Chapter 7.

Creditors holding unsecured nonpriority claims in Chapter 13 must be paid at least the amount that they would have received in Chapter 7. This is called the Best Interests of the Creditor test. The amount that unsecured creditors will actually receive depends upon the percentage (also called the dividend) confirmed in the Chapter 13 plan.

Taxes are normally paid as priority claims, unless:

1) The income tax or sales tax is over three years old and meets certain other conditions, including no recent offer and compromise agreement with the taxing authority . § 507(a)(8)(A).

2) The property tax, whether or not assessed, was due over one year prior to the bankruptcy filing.

If the tax is not a priority claim then it will be paid the same dividend as other unsecured creditors.

Conclusion: If the $40,000 you owe in back taxes is over three years old, this amount can be listed as an unsecured debt and discharged in any chapter. If the debt is less than three years old, the amount must be paid in full in Chapter 7, but can be discharged under a Chapter 13 full compliance discharge.

In most cases you should file your tax return before you file bankruptcy. The tax is due when you file. Prepetition taxes can be placed on your petition and paid over time through a Chapter 13 plan. Postpetition debt is only payable through a Chapter 13 plan if the taxing authority files a proof of claim. If no claim is filed, the debt is not discharged even if you receive a full compliance discharge.

The law now requires that where a tax return was required, a Chapter 13 Debtor must file tax returns for each of the four years prior to the bankruptcy filing. If you can not provide copies of the returns by the first day your Meeting of Creditors is scheduled, the law requires that your case be dismissed. § 1308.

Disclaimer: Handling taxes in bankruptcy can be a complicated process. Sometimes the advice of a tax professional will be required. This article is meant to give a brief overview of when taxes can be discharged in Chapter 7 and Chapter 13 bankruptcy filings. No attorney-client relationship is formed or intended.

Deficiency Judgments in Foreclosure

Question: My home was taken by the bank through foreclosure several months ago. Now, the junior lender on my home is asking me to pay them another $80,000. Wasn’t this loan wiped out when the senior lender foreclosed? What is a deficiency judgment? Do I need to file bankruptcy?

Answer:
When a lender forecloses on a property they may do so by judicial foreclosure, a legal action in court, or by nonjudicial foreclosure, the power of sale contained in a deed of trust or mortgage. A deficiency judgment is possible when the amount received in a foreclosure sale is not enough to pay off the amount owed on the mortgage loans. A lender who chooses nonjudicial foreclosure cannot receive a deficiency judgment. However, while a foreclosure sale will strip any junior lienholders of their security interest in the property sold, they will retain the right to sue the borrower in court for the amount owed.

This is so because the “one action rule,” described in CCP § 726, prevents the lender who foreclosed from using nonjudicial foreclosure to speed up the sale and then using the courts as a second method of recovery. The junior lender, on the other hand, did not choose the nonjudicial foreclosure route and is not barred from using the courts to try and collect on the debt.

This exception to the general rule that “no deficiency judgments are available when there is a nonjudicial foreclosure” does not apply when a single lender holds both the junior and senior liens. But when the single lender sells or assigns the liens to independent parties, the new buyer/assignee is ordinarily protected and could pursue a court action for a deficiency judgment.
If a junior lender wants to go to court to obtain a deficiency judgment they must do so within three months of the foreclosure sale. CCP § 580(a). If three months have passed since your foreclosure sale, the junior lender can no longer go to court to get a judgment and attach your other property. However, the debt remains and the junior lender can continue to try and collect the debt by contacting you. If you file bankruptcy the automatic stay would prevent all creditors from contacting you for a period of time and this debt would be removed if you receive a discharge in bankruptcy.

Tax Implications of Nonjudicial Foreclosure
When a lender uses nonjudicial foreclosure, the lender, in effect, forgives, or gives to the borrower, the necessary amount over the foreclosure sale price, to pay off their loan. This amount which is forgiven, or given, to the borrower may count as income to be reported on the borrower’s taxes. The Mortgage Forgiveness Debt Relief Act of 2007 excludes from gross income discharges of indebtedness on principal residences that occur on or after January 1, 2007, and before January 1, 2010 (extended through 2012). If you have lost a home to foreclosure you should speak with your tax professional.

Disclaimer: This article is intended for informational purposes only and no attorney-client relationship is formed or intended. The contents of Wikipedia articles are not controlled by the author.

Considering Bankruptcy? You're Not Alone.

The decision to file bankruptcy is a hard one to make. You're wondering how it will affect your future finances, but also what the decision will have on your reputation. Perhaps, you are considering the moral and ethical dimensions. If you are a person in recovery then you might be wondering if you will need to one day make amends and repay the debt that is discharged through bankruptcy. If you are in over your head, then bankruptcy might be the best option for bringing balance back to your financial life.

In the United States, over one and a half million families file consumer bankruptcy cases each year. Even large municipal governments, like Orange County California, have filed for bankruptcy.

Bankruptcy is one way to level the playing field between creditors and debtors. When a debtor is behind in payments, the creditor might charge a late fee and increase the interest rate. This can make it even harder for a debtor to catch up. Creditors sometimes are willing to negotiate better terms for a debtor to avoid a complete discharge of the debt through bankruptcy.

While it is possible for a debtor to file bankruptcy on their own ("pro se"), the 2005 Amendments to the Bankruptcy Code created new requirements that must be met. Improper filing may affect your rights. Assistance from a licensed and insured attorney is more important than ever. You can contact me at (323) 822-9422 or by email at link@link-schrader.com