Monthly Archives: April 2011

Business Taxes: Are They Dischargeable in Bankruptcy?

By Kitty J. Lin, Attorney at Law

If you own your own business, your worst nightmare is the situation when your business fails.  To add further salt to the wound, not only did your business fail, but you realize you still owe the taxing authorities for sales taxes and payroll taxes, and you are still personally responsible for those, even if you are no longer in business.  Filing for bankruptcy may help, depending on your situation.  There are several categories of taxes, and they are treated differently in bankruptcy, depending on what category they are in.

Personal Income Tax

First, as previously discussed in our article about dischargeability of personal taxes, Can Taxes be Discharged When Filing Bankruptcy?, taxes that you personally owe are dischargeable if they are more than three years old, filed more than two years ago, assessed more than 240 days ago, not filed fraudulently, and the taxpayer is not guilty of willful tax evasion are dischargeable in a Chapter 7 or Chapter 13 bankruptcy.  Taxes that do fall under this category (meaning the taxes are less than three years old, or filed less than two years ago, or assessed less than 240 days ago, was filed fraudulently, or the taxpayer was found to be guilty of willful tax evasion), are considered “priority taxes” which are not dischargeable in bankruptcy.  Any debt that is considered non-dischargeable in bankruptcy means that you are still responsible for paying this debt whether you file for bankruptcy or not.  If you have any non-dischargeable debt, see Non-Dischargeable Taxes: What Happens if I Cannot Afford to Pay My Tax Liability?

Sales Tax

If you owe the state sales tax, whether or not they are dischargeable will depend on whether the sales taxes are considered an “excise tax” or “trust fund tax.”  How the sales taxes are categorized depends on your state.  Sales tax is considered a trust fund tax if the tax is assessed on the customer at the time of the sale and the responsibility to collect the tax is on the business owner.  The business owner is supposed to collect the tax to turn over to the taxing authority.  Trust fund taxes are not dischargeable in bankruptcy.

Sales tax that is the responsibility of the owner for the privilege of doing business in the state is considered an excise tax.  California is an “excise tax” state, so that means that the business owners are responsible for the sales tax, not the customer.  It may be a little confusing, since almost all the business owners pass on the sales tax to their customers, but the ultimate liability of the sales tax is still on the business owner.  Excise taxes are dischargeable in bankruptcy, so that is good news for failed business owners in the state of California.

Payroll Tax

Payroll taxes are broken out into two parts: those taxes that are taken out of an employee’s paycheck, and those taxes that are paid by the employer.  The taxes that are taken out of an employee’s paycheck (such as federal income tax, state income tax, social security, and medicare) are considered “trust fund taxes.” It is the business owner’s responsibility to turn over those funds taken out of the employee’s paycheck to their taxing authority.  The funds taken out of the employee’s paychecks are “held in trust” by the business owner to be turned over to the taxing authority.  If the business failed (or even if the business is still continuing), and the funds were used to pay off other debt or expenses other than to turn over to the taxing authority, the taxing authority will not be sympathetic.  They only care that the business owner withheld these funds, but used it for other purposes than which it was held for.  As with the sales taxes that are considered to be “trust fund taxes” payroll taxes withheld from an employee’s paycheck are considered non-dischargeable in bankruptcy.

The payroll taxes that are paid by the employer are “non-trust fund taxes.”  These taxes are dischargeable in bankruptcy.

The dischargeability of taxes in bankruptcy is a complicated issue that should be discussed with an attorney prior to filing.  If you need to consult with an experienced bankruptcy lawyer or bankruptcy attorney, please call us at 877-9NEW-LIFE (877-963-9543) for a free consultation today.

How are Incentive Stock Options Treated in Bankruptcy?

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Many companies that are publicly held companies and privately held give employees incentive stock options each year.  These shares usually vest at a predetermined percentage each year the employee stays employed by the company.  The company allows the stock to vest over a period of time to ensure the employee to make continued efforts on behalf of the company to receive the full grant of stock options.  The language of incentive plans may differ significantly.  This article discusses how purely incentive stock programs are treated if the stock incentive plan is not a qualified retirement account.  The specific language of a plan may make this article not applicable.  To determine the treatment of your incentive stock options when filing bankruptcy you should seek the counsel of an experienced attorney in your jurisdiction.

Most stock incentive plans have a section which defines the purpose of the plan.  When determining how the stock is treated the purpose section will most likely control.  Many plans will have language that provides the stock incentive plans is to motivate key employees to produce a superior return to the stockholders of the company and promote recruiting and retention of talented key positions.  This means that the plan is most likely not meant for retirement purposes or designed and used for retirement purposes.  The fact that these same companies usually have a 401k plan, or other retirement plan for the employee to participate in, is further evidence that their stock incentive plan is not for retirement purposes.  If the plan is not for retirement purposes or designed and used for retirement purposes the plan cannot be protected or exempted in bankruptcy as a qualified retirement account.

At the same time the stock incentive plan may not have to be solely used for retirement purposes though.  The stock incentive plan may have dual purposes such as supplementing income and to provide for retirement too.  The purpose of the plan must be scrutinized closely to determine if the company has designed for a dual purpose.

The Court will also look to see how the employee has used the stock incentive plan.  If the employee has exercised stock options prior to the filing of the bankruptcy case, the use of the funds received will be a factor as to how the plan is being used.  If the funds are used to improve a home or buy a car, theses uses of the funds are clearly not for retirement purposes.

In addition, a stock incentive plan may still be protected if the plan is subject to ERISA (Employee Retirement Income Security Act).  Whether the plan is subject to ERISA is again a fact based analysis as to how the plan is administered and the purpose and nature of use of the funds.  Factors include if payments under the plan are made after retirement, or skewed towards retirement, communications regarding the plan indicate the plan is maintained for purpose of maintaining retirement, or if the surrounding circumstances provide a reasonable person can ascertain the intended benefits are for retirement purposes.

The bottom line is if you have a stock incentive plan in which you have received stock options a close examination of the stated purpose of the plan, how the plan is administered, and how the funds can be used and when must be reviewed in detail to determine whether the plan can be protected in bankruptcy.

For more information regarding stock incentive plans and bankruptcy please contact our Oakland bankruptcy lawyer or bankruptcy attorney to determine your rights when filing for bankruptcy protection under Chapter 7 or Chapter 13 of the Bankruptcy Code.

Non-Dischargeable Taxes: What Happens if I Cannot Afford to Pay My Tax Liability?

By Kitty J. Lin, Attorney at Law

With taxes soon to be due this year on April 18, 2011, a lot of consumers are faced with this question:  I know I owe a lot of money to the Internal Revenue Service and/or California’s Franchise Tax Board, and I know that it is non-dischargeable.  How do I take care of it when I don’t have any money to pay for it?

As discussed previously (See Discharging Taxes in Bankruptcy), older taxes are generally dischargeable in bankruptcy.  However, this doesn’t help you if you owe money for the 2008, 2009, or 2010 tax years to the IRS or FTB.  There are several options available to you if you owe money for these tax years.

Installment Payments

If you owe money to the IRS or FTB, but you do not have enough money to pay the entire amount at one time, one of the options available is to set up installment payments with the taxing authority.  Be aware, this does not stop the penalties and interest from accruing on the amount of taxes owed.  This just means that the taxing authority is allowing you to make installment payments.  Both taxing authorities provide a maximum of 60 months (5 years) to pay off your tax liability.  You can find the links to apply for an installment agreement here:

IRS – if you owe less than $25,000:  http://www.irs.gov/individuals/article/0,,id=149373,00.html

IRS – if you owe more than $25,000: http://www.irs.gov/pub/irs-pdf/f433f.pdf

FTB – if you owe less than $25,000:  http://www.ftb.ca.gov/online/eIA/Apply_Online.asp

Offer-in-Compromise (OIC)

If you are currently unable to pay your tax liability, and you know you won’t be able to pay in the near future, you may be eligible for an Offer in Compromise from the IRS and/or FTB.  An OIC Program allows you to pay less than what you owe if you can prove that the offer is the best that you can do based on your circumstances.  Everyone’s situation is different, so the evaluation of whether you qualify for an OIC differs from person to person.  Both the IRS and the FTB require the taxpayer to complete forms and return to them in order to be considered for the OIC Program.  You can find them here:

IRS:  http://www.irs.gov/pub/irs-pdf/f656b.pdf

FTB: http://www.ftb.ca.gov/forms/misc/4905PIT.pdf

Chapter 13 Bankruptcy

If you are unable to pay the taxing authorities the full amount of your tax liability, another option to consider is filing a Chapter 13 bankruptcy to pay off your debt through a Chapter 13 plan.  Chapter 13s can last either 3 years (36 months) or 5 years (60 months).  The bankruptcy option is a great idea especially if you owe other debt, such as unsecured debts like credit cards, medical bills and personal loans.  You would need to pay 100% of the non-dischargeable portion of the tax liability because the taxing authorities are considered unsecured priority creditors, but unsecured creditors receive from 0% to 100% of their debt depending on your circumstances.  One of the benefits of filing a Chapter 13 plan to pay your tax liability is the fact that only the actual tax liability is priority.  Penalties and interest are not accrued on your account as you are paying off the debt in your Chapter 13 plan.  This could potentially save you a lot of money!  The penalties and interest are dischargeable and treated the same as all other unsecured creditors.

To determine if filing a Chapter 13 bankruptcy is the best option for you in your circumstances, it is advisable that you seek the advice of an experienced bankruptcy attorney.  Please contact one of our bankruptcy lawyers or bankruptcy attorneys today for a free consultation.  You can also contact us  toll free at 877-9NEW-LIFE or 877-963-9543 or go to our website submission for to request an appointment today.  We have offices in Redwood City, Oakland, San Jose, and San Francisco for your convenience.

Is HAMP a Colossal Failure? What is Next for Homeowners Seeking Loan Modification?

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The Home Affordable Modification Program began in March 2009 and it could not be clear that HAMP is a colossal failure.  The Obama administration set a goal to help 3 to 4 million American homeowners.  HAMP has only helped a tiny portion of that goal and has not reached the vast majority of American homeowners feeling the effects of the mortgage crisis.  The Congressional Budget Office estimated $72 billion in Troubled Asset Relief Program money would be available to fund HAMP.  Recently the Congressional Budget Office provided that HAMP would end up costing taxpayers $22 billion.  It would seem that servicers are collecting fees from the HAMP program without providing permanent loan modifications to distressed homeowners at the expense of all taxpayers.

To top it all off, on Tuesday March 29, 2011, Congress voted 252 to 170 in favor of ending HAMP altogether.  President Obama has provided he will veto any attempt to end HAMP and whether the Senate will agree with Congress to end HAMP still remains to be seen.  Most likely HAMP will continue as a program that gives hope to distressed homeowners but does little to actually successfully modify their loans permanently.

Has HAMP Helped Direct Loan Modifications From Servicers?

According to statistics released by services and the Treasury Department the number of loan modifications services issued on their own and not according to HAMP number 4 to 1.  One positive of HAMP is that it arguably increased the number of loan modifications than prior to the implementation of HAMP.  The argument is that servicers had very little incentive to modify loans.  But why are there so many more loan modifications if you seek modification directly from the servicer instead of applying for a HAMP loan modification?  One reason seems to be that services offer less favorable terms of modification, higher fees that are prohibited by HAMP and the servicer loan modification has a higher rate of repeated default.

So What is Next?

The HAMP program should be revised to make the loan modification process more transparent and implement mandatory structured procedures for mortgage companies and servicers to follow.  Simply asking for documents and then continually asking for more information gives homeowners false hope.

If you are having trouble making your mortgage payment, or are behind on your mortgage payments bankruptcy can help.  A free consultation with one of our Bankruptcy Lawyers or Bankruptcy Lawyers usually lasts 30 to 40 minutes depending upon the complexity of your case.  Call today toll free 877-963-9543 to start your new life debt free today.