Monthly Archives: April 2013

Discharge Taxes in Bankruptcy

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What happens if you owe taxes and you need to file for bankruptcy? Are taxes dischargeable in bankruptcy? Taxes can be discharged depending upon the circumstances. The general rule is that if prior to filing bankruptcy the taxes are due more than three (3) years ago, or the return was filed more than two (2) years ago, and the taxes are assessed more than 240 days prior to the filing of your bankruptcy case (assuming the taxes were not filed fraudulently) should be dischargeable in your current bankruptcy case.

Like any tax law there are some limitations and exceptions to this general rule. Make sure the bankruptcy lawyers you seek counsel from obtain your tax transcript from the Internal Revenue Service. There are certain activities that may stop the clock from ticking and therefore may keep you from getting that discharge in your bankruptcy case. These activities that stop the clock are called “tolling provisions.”

Assessed 240 Days Prior to Filing Bankruptcy

One of the tolling provisions is if there is a pending Offer in Compromise with the taxing authorities. The time that the Offer in Compromise is in consideration stops or “tolls” the 240 day assessment requirement plus an extra 30 days. That means that the tax will not be dischargeable until at least 270 days after it was assessed, including the time that the Offer in Compromise was on the table. If you were paying your taxes through an installment agreement you do not have to worry. The time you are in the installment agreement does not count against the time period for dischargeability of taxes. If you have filed a previous bankruptcy petition that prevents the collection of the taxes, so the 240 day assessment period is tolled and an additional 90 days is added on top of the 240 days.

Due More Than 3 Years Prior to Filing or Filed More Than 2 Years Ago

The three year rule includes any applicable extension periods. For example, if you owe taxes for 2001 tax year, the taxes are due April 15, 2002. These taxes will not be eligible for discharge until April 15, 2005 (3 years from the time the taxes are due). If the date the taxes are due falls on a weekend, then the taxes will be due the next business day. This may mean that taxes are sometimes due on April 16 or April 17. If you are provided with an extension then your taxes will not be due until October 15, 2002 and your taxes will not be dischargeable until October 15, 2005. A bankruptcy filing will also toll the three year rule.

However, it is very important to make a distinction of whether the bankruptcy filing actually stayed the collection of the taxes. If you filed a Chapter 13 bankruptcy case and owed taxes prior to filing the bankruptcy the taxes are included in the Chapter 13 plan. The taxing authority is therefore prevented from collecting against you. If the Chapter 13 case is dismissed for any reason and you file a subsequent bankruptcy you need to remember that the while the taxes were in the Chapter 13 plan the time is tolled. The time you are in the Chapter 13 is not added as part of the three years. If you filed a Chapter 13 bankruptcy case but for whatever reason your tax debts were NOT included in the Chapter 13 plan (for example, if you filed your bankruptcy case and then owed taxes for the years after the Chapter 13 plan was confirmed), the taxing authority was not prevented from collecting the taxes from you because the estate property revested in you upon confirmation of your Chapter 13 plan. See In re Jones, (No. 10-60000, 9th Circuit, 2011). You need to make sure you ask the bankruptcy lawyers in your jurisdiction about whether property of the estate revests in you the debtor. Different jurisdictions have different Chapter 13 plans and not all revest property of the bankruptcy estate in you the debtor upon plan confirmation.

Small Business Bankruptcy

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If you own a business, sole proprietor, a corporation or an limited liability company you can still file a personal bankruptcy case or a small business bankruptcy. There are a number of issues to address and this article touches on some of the most common. Speak with an experienced bankruptcy lawyer in your jurisdiction for more information. Different jurisdictions do have different practices.

In the Northern District of California when filing a chapter 7 bankruptcy, just like many other jurisdictions, the trustee assigned to your case can take over the business and operate it. It is rare though. If the business is worth quite a bit of money and is making money you most likely do not need to file bankruptcy anyway. The value of the business and the business assets are an issue that needs to be discussed at length. Valuing a business can be very difficult and there are a number of different ways to determine a value.

For sole proprietors the filing of a Chapter 7 case should be the least complicated. Assuming the business does not have significant assets and the income it is producing is not very much filing a Chapter 7 bankruptcy should not be too complicated. The California Wild Card exemption should be enough to protect the assets along with the tools of trade exemption.

If you own a corporation or limited liability company it becomes more complicated given that you are separate legal entities. If the only owners are you or your spouse and you are taking a distribution or income you should have w-2’s to document your income. Again the valuation becomes an issue.

If the value of your business is somewhat significant and it is producing decent income a Chapter 13 bankruptcy may be the best choice to allow you to continue to operate the business and get rid of some or all of your debts depending upon the circumstances of course. In a Chapter 13 a liquidation analysis must be made and if your business is worth more than what can be protected then that is your obligation to your creditors. The obligation is paid over three to five years in the chapter 13 plan of reorganization. Again, this is article touches on basic concepts regarding filing bankruptcy when you are operating a business or own a corporation or limited liability company. Please consult a bankruptcy attorney in your jurisdiction for more detailed information about your specific circumstances.

What Do Debt Collectors Pay For Debts

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This is one of the most common questions we are asked by potential bankruptcy clients. Once financial problems make paying credit card companies each month the likelihood of the debt being sold or transferred to a debt collector or collection agency are high. So what do debt collectors pay for debts?

In January 2013 the Federal Trade Commission issued a report about the collection agency industry. The FTC is trying to obtain information about the process of buying and selling debt. The report is entitled “The Structure and Practices of the Debt Buying Industry.” The average amount paid for debts by collection agencies is $0.04 per dollar of debt. So if you had a debt of $15,000 owed on a credit card and it was purchased by a debt collector, the debt collector would pay on average $600.00. The older the debt the less was paid and conversely the new the debt the more that was paid. Keep in mind that the statute of limitations for breach of contract is four years in California. Please consult your state’s statute of limitations for breach of contract claims.

The FTC further says in the report that collections agencies typically received the information required to validate a debt pursuant to the FDCPA. Debt collectors also received or were likely to receive the name of the original creditor which a consumer is entitled to know upon request pursuant to The Fair Debt Collection Practices Act.
According to the study if a debt was disputed as not owed only 2.9% of these disputed debts were then resold to another collector.

One of the most interesting sections of the report discusses time-barred debts. What is a time-barred debt? It is a debt that the statute of limitations for enforcement has run out. This means that you cannot be sued to be forced to pay the debt and the debt is therefore unenforceable. So this begs the question of why does a collection agency attempt to collect on a time-barred debt? Unfortunately most collection agencies do not disclose that they do not have the right to sue and they try and get you to make a partial payment. Once you make the partial payment this revives the statute of limitations on the whole debt. The FTC says that a debt collector should disclose that they do not have the right to sue and that any partial payment will revive the statute of limitations. I have never heard of a collection agency making honest disclosure such as this. I have heard story after story from clients and potential clients about misleading or false statements to fool people into making payments on defaulted debts.

Secured Debt and Bankruptcy

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A common question is can I keep my house or my car when filing bankruptcy even though I still owe money on the loan? The answer is definitely yes. Just keep making the normal payment you have always made each month and you should keep the collateral, the vehicle or house.

But what about things like a motorcycle, an ATV, a travel trailer, an airplane or motor home? If you are current on the payments for the loans you should be able to keep them when filing a Chapter 13 bankruptcy case. The Ninth Circuit Court of Appeals made it clear that these secured debt payments are not within the courts discretion to determine whether they are reasonably necessary or not. See In re Welsh (No. 12-60009, 9th Circuit, March 25, 2013). The Welsh’s owned a house, three cars, 2 ATVs and a trailer. Given this decision bankruptcy lawyers can now provide clearer counseling to clients.

The Chapter 13 trustee reasonably and understandably argued that the Welsh’s were making payments on luxury items not reasonably necessary for the maintenance and support of the Welsh’s or their dependents. The key here is that the Chapter 13 Statement of Monthly Disposable income or Means Test is governed by §707(b)(2) of the Bankruptcy Code. Section 707(b)(2) does not limit the amount of secured debt payments that reduce a debtor’s disposable income. Line 42 or Form 22C, Chapter 13 Statement of Disposable Income, lists the long term secured debts deducted from a debtor’s disposable income. The secured debts are listed in Schedule D of the bankruptcy petition.
The Ninth Circuit Court of Appeals held that if Congress wanted to limit the amount of the secured debt a debtor could have they would have provided language for it in Section 707(b)(2). So, if your monthly mortgage payment is 70% of your monthly income and therefore you have no money left over after living expenses for your credit card companies that is okay. If you are single and have two car payments, two ATV payments and a motorcycle payment is that okay too? You are single and need all of these toys? According to the decision in In re Welsh it is not bad faith to continue to make regular payments on secured debts.

It is still possible that a trustee could attempt to object to confirmation of the chapter 13 plan under other grounds. Make sure that you fully disclose your income expenses and assets to your bankruptcy attorney so they can give you the best possible advice.

Should I Pay A Collection Agency?

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The question, “Should I pay a collection agency is?” is a common question. There is no easy answer though. A collection agency purchases a debt, is transferred or assigned the debt for collection from original creditor. How much they paid for the right to collect the debt or how of the debt are they entitled to is always a question. Generally most collection agencies want to obtain some sort of payment for as little work as possible.
What is as little work as possible? Well there are many reputable collection agencies that do not resort to violating the FDCPA (Fair Debt Collections Practices Act) when attempting to collect a debt. They do not call you at every hour of the day or threaten to put you in jail.

Unfortunately there are quite a few that use harassing phone calls and intimidation tactics to try and make you pay. You can sue a collection agency for damages if they violate the FDCPA. You can receive up to $1,000 in statutory damages plus attorney fees and costs. You may also receive damages for emotional distress, lost wages, loss of consortium and punitive damages.

There are many violations of the Fair Debt Collections Practices Act. Collection agencies should not call you before 8:00 a.m. and after 9:00 p.m. They cannot harass you by calling you continuously all day. No contact should be made with a third party disclosing that you owe a debt to them. A collection agency can contact a third party to ask about your location and nothing more. After the initial contact with the third party the third party should not be contacted again to ask about your whereabouts. If you receive calls at work and then tell the collection agency that you are not allowed to receive calls from them at work they should not call back. Disturbing you at work is not only embarrassing but can lead to termination of employment if you productivity is significantly affected.

A debt collector cannot belittle you on the phone or lie to you to induce you to make a payment. The truthful and hones collection of a debt is always allowed, but deceptive collection practices are not. You will know when a debt collector is not speaking to you correctly or doing something the is against the law. You will feel it. Give us a call toll free at 1-877-963-9543 to discuss your circumstances and determine if you have a claim for damages.