Category Archives: Bankruptcy and Taxes

What Should I Do If I Have Unfiled Tax Returns?


You must file the late or unfiled tax return as soon as possible no matter how difficult and unpleasant going through that process is for you. I will be providing a number of reasons below for why it is so important to file tax returns on time, or as soon as humanly possible if you miss the deadline to file the tax return. Filing for an extension kicks the can down the road, but at least you will not miss the deadline or be considered to have an unfiled tax return.

As a bankruptcy attorney I have been part of thousands of bankruptcy cases in one shape or form at this point I am of the opinion that most people do not timely file returns because they will owe a significant amount of taxes. A little known fact is that most of our bankruptcy cases whether Chapter 7, Chapter 13 or Chapter 11 involve taxes that are owed to either the Internal Revenue Service or here in California the Franchise Tax Board. TAXES CAN BE DISCHARGED IN BANKRUPTCY. Almost every celebrity bankruptcy involves unpaid taxes. Read some of my other articles about celebrity bankruptcy cases like actress Teri Polo or actor Gary Busey and on and on. Just Google celebrity bankruptcy and Ryan C. Wood. Not filing a tax return for a year you owe taxes is the single worst thing you can do even if you know you are going to owe taxes that you cannot pay immediately. Even if you are going to owe so much you cannot possibly pay the taxes you still need to file your tax returns on time every time to get the best treatment for repayment. When you do not file a tax return on time it starts a chain of events that are designed to make it extremely difficult to get rid of the taxes owed. Please note there is a statute of limitations for taxes owed to the IRS, but that statute of limitations can be suspended or altered depending upon your circumstances and this article is not addressing issues related to the statute of limitations.

Do not wait to for the IRS to take action.  File your unfiled returns.

Do not wait to for the IRS to take action. File your unfiled returns.

Do Not Ignore Notices From The IRS

First off, yes, life is not easy and for whatever reason you did not file your tax return on time. The IRS will give you notice after notice to file your return on your own. If you ignore these notices this will be a big factor in what I will be wrapping this article up with about Substitute File Returns or an SFR. You will be given all kinds of chances to file a tax return even after the deadline to file the return and pay any taxes owed has long passed. Do not ignore the notices you receive in the mail. You will not get a phone call. You will get notices in the mail that you must read and respond to. I tell client after client that you do not want to be in the pile of files that is for people who are not communicating with the IRS. You want to be in the pile of files for people who are communicating with the IRS and working the problem. I know it is not easy. You have to address the problem sooner than later for someone like me to someday make it all go away forever.

So, Have You Ever Heard of a Substitute Filed Return?

I hope for your sake this is the first time you have heard of this. You do not want this period. A Substitute Filed Return (SFR) is what the IRS puts together as best they can with the information they have to file a tax return on your behalf for a tax year you did not file a tax return for. The IRS will only file a SFR when you have ignored them over and over again. The IRS even knows the numbers they use are not completely accurate. The IRS knows certain deductions will not be made and potentially income not counted. The result is a SFR filed by the IRS on your behalf that everyone knows is not completely accurate, but nonetheless you get assessed the amount of taxes they say you owe in the SFR. Once the taxes on the SFR have been assessed you will then be given more notices about your rights to object to the assessed taxes and correct any errors. Again, do not ignore notices in the mail you receive from the IRS. If you again do nothing you have more or less sealed your fate

Why Substitute Filed Returns Are So Dangerous

In my bankruptcy attorney world SFR’s are very dangerous given the current interpretation of the law and whether the taxes owed and assessed from a SFR are ever dischargeable when filing for bankruptcy protection. You have to understand that when all else fails, us bankruptcy attorneys ultimately clean up the mess once and for all, if the law allows. Long story short you should file a tax return for a year the IRS already filed a SFR on your behalf. You must correct their numbers, add income, add deductions and more or less make the return accurate and the amount of taxes you owe accurate. This could lead to the amount of taxes owed to decrease or increase. But what happens to the taxes owed and assessed from a SFR if you file bankruptcy? As mentioned before taxes absolutely can be discharged when filing bankruptcy if the taxes meet certain requirements. The problem right now is that the Ninth Circuit Court of Appeals agreed with the Internal Revenue Service’s interpretation of what the definition of a “return” is when you file your own return after the IRS files a SFR on your behalf. Let me back up a little. The Bankruptcy Code addresses late filed returns and this is part of the issue I am discussing. Taxes owed for a late filed return can in theory be discharged under the Bankruptcy Code, but the requirements are even more narrow or stringent than when a return is filed on time and there are taxes owed. That is the short of it. So, the definition of what constitutes a “return” under the Bankruptcy Code is the issue. The Ninth Circuit Court of Appeals held that the tax return you file with the correct income, correct deductions and therefore correct amount of taxes actually owed may not be a “return” for bankruptcy purposes given this filed return is not an honest and reasonable attempt to comply with the tax laws since the return was late filed . . . . . . Well, that is unfortunately one way to interpret the law and right now that is it. Let me back up again. So you did not file a return, the IRS filed a SFR on your behalf and assessed you some made up amount of taxes, then you file an accurate return to correct the numbers in the SFR and if and when you seek to discharge these taxes owed according to the accurate return you just filed you may not be able to because the fact that the return was late filed and filed after the SFR has been interpreted that your accurate filed return is not an honest and reasonable attempt to comply with applicable tax laws and therefore not a “return” under the bankruptcy code so the taxes owed for that year cannot be discharged. Did that make sense to you? Let me try again. To allow taxes owed for a late filed return to be discharged when filing bankruptcy there has to be a “return” filed. See Bankruptcy Code §523(a)(1)(B)(i).
All this mess of analysis will take place because you did not timely file your tax return. If you had timely filed that tax return the taxes could easily be discharged when filing for bankruptcy protection, assuming the taxes owed meet the normal requirements to be discharged. The IRS will argue that the SFR assessed taxes will not be part of the “return” you later file that actually has the accurate information. You will forever be in the category of a SFR was filed and now there is an issue as to whether your return filed after the SFR is an honest and reasonable attempt to comply with the applicable tax laws. So far convincing the appellate courts that the later filed return is a “return” under the bankruptcy code has not been very successful. It is truly a fact based analysis on a case by case basis. So, again, file your tax returns on time even if you will owe a lot of taxes and if you miss the deadline to file the return or extended deadline to file the return file your return as soon as you can. Do not let the IRS file a Substitute Filed Return on your behalf.

Depending Upon Your Circumstances Your Tax Refund Can Be Protected When Filing for Bankruptcy


It is that time of year again. It is time to get your income documents together and figure out how much you owe to the government or how much of a refund you will receive. If you receive a tax refund each year from the Internal Revenue Service or the Franchise Tax Board it can be protected when filing for bankruptcy whether your file a Chapter 7 or Chapter 13 bankruptcy case.

When filing for bankruptcy protection the bankruptcy estate includes all legal or equitable interests in property. See Section 541(a)(1) of the Bankruptcy Code. Just because you have not received the tax refund yet does not mean it is not an asset of yours that should be listed in your bankruptcy petition in the schedule of assets, Schedule B. Whether you can protect the refund depends upon your other assets and the exemptions available to protect your assets. Exemptions protect your assets by exemption or removing your assets from the bankruptcy estate so that you can keep your assets to live life and continue to go to work and live. For example, California has a generous wild card exemption worth $26,925.00. This exemption can be applied to any combination of assets like bank account balances, tax refunds, high value household goods, vehicles or any other asset. Most state’s exemptions provide a limited amount for vehicles. If you have more than one paid in full vehicle in California you will most likely have to use some of the wild card exemption to protect both vehicles and remove them from the bankruptcy estate. So let us look at some numbers. If you have $12,000 in your bank accounts, a second vehicle that is paid in full and worth $7,500, a television worth $2,000 (just bought it on Black Friday), and an anticipated tax refund from the IRS and FTB of $5,300 you will max out the wild card exemption mentioned above. All of the assets just listed above will be exempted/protected/removed from the bankruptcy estate and you should keep all of it while still filing for bankruptcy protection. Different states have different limits to protect assets. So your state may not have as generous of exemptions. The bottom line is for your tax refund to be protected/exempted it should be listed in Schedule B and exempted by an applicable bankruptcy exemption so that you can keep the tax refund when you receive it.

Make sure you protect and keep your tax refund when filing bankruptcy.

Make sure you protect and keep your tax refund when filing bankruptcy.

In re Brittany Le’von Miller; Tax Refunds and Abandonment of Estate Property

Tax refund issues were just highlighted in a recent unpublished United States Bankruptcy Appellate Panel of the Ninth Circuit case, Case No. AZ-13-1307-JuKiD, In re Brittany Le’von Miller. For starters the debtor in this case filed her bankruptcy petition in August 2012, on October 25, 2012 the Chapter 7 trustee filed the notice of no distribution, debtor received her discharge and the case was closed and on May 9, 2013, over six months after filing the notice of no distribution, the Chapter 7 Trustee received the debtor’s tax refund totaling $3,259.00 directly from the Internal Revenue Service.

In this case the debtor in her originally filed schedules listed her expected tax refund in Schedule B with a value of “unknown.” The Chapter 7 trustee subsequently filed their notice of no distribution and the Chapter 7 case was discharged and closed. The notice of no distribution provides some case details and it says there are no assets to distribute for the benefit of creditors in the case. After the deadline for creditors to object to the discharge of the debtor’s debts has run out the bankruptcy court will sign the order of discharge and the Chapter 7 case is closed. When the case is closed Section 554(c) says all property is abandoned to the debtor. This is what happened in this case, but then the Chapter 7 trustee received the debtor’s 2012 totaling $3,259.00 refund directly from the Internal Revenue Service. Before going further, there is a question that is unanswered and unexplained. Why did the Internal Revenue Service send the debtor’s 2012 tax refund to the Chapter 7 trustee at all?

After the Chapter 7 Trustee received the 2012 tax refund the trustee immediately tried to reopen the Chapter 7 case and revoke/withdraw the notice of no distribution of assets. The debtors bankruptcy attorney argued the tax refund was abandoned upon the closing of the bankruptcy case. The trustee argued that Section 544(d) applied or inadvertent mistake as to filing the notice of no distribution. Apparently the bankruptcy court granted the Chapter 7 trustee’s motion and the debtor appealed. For an asset to be abandoned under Section 554(c) four requirements must be met: (1) the tax refund must have been properly scheduled; and (2) not administered by the trustee; (3) debtor’s case must close; and (4) abandonment is to the debtor. See DeVore v. Marshack (In re DeVore), 223 B.R. 193, 197 (9th Cir. BAP 1998). The court also recognized in Devore that the court has discretion to modify or revoke and technical abandonment under Section 554(c).

In the this particular case the Ninth Circuit Bankruptcy Appellate Panel held that the bankruptcy court needed to make findings of fact and law that could be reviewed and not just make a ruling with no explanation as to how it was arrived at. That did not happen, so this issue was remanded back to the original bankruptcy court for further findings. Time will tell what the outcome will ultimately be.

What Could The Debtor Have Done Differently?

The debtor arguably could have listed an estimated value of the tax refund. Would this have prevented the resulting problems from arising? Who knows, but at least the Chapter 7 trustee would have had a number to work with and evaluate the if creditors could be benefited. The debtor’s filed Schedule C clearly provided only 60% of her expected 2012 tax refund could be protected.

What Could The Chapter 7 Trustee Have Done Differently?

The Chapter 7 Trustee could have continued the 341 meeting of the creditors for the debtor to amend the Schedule B and actually list a value of the expected 2012 tax refund. It is unclear whether the Chapter 7 trustee questioned the debtor at the 341 meeting of the creditors as to potential value of the expected 2012 tax refund. Also, the Chapter 7 trustee could have not filed the notice of no distribution and held the case open until the amount of the 2012 tax refund was known and certain.

Possible Benefit to Creditors of the Bankruptcy Estate?

For some additional perspective, the amount of the 2012 tax refund that is not protected and available to administer by the Chapter 7 trustee is a total of $1,303.60 (40% of the 2012 refund totaling $3,259.00), of which the Chapter 7 trustee is entitled to $325.90 (25% of the $1,303.60, of the unprotected assets to be distributed for the benefit of the debtor’s creditors). So without deducting additional administrative costs, like postage for example, the debtor’s creditors in this Chapter 7 case could potentially share a pro-rata distribution of around $977.70. That is if the bankruptcy court allows the case to be reopened and the revoking of the Chapter 7 trustee’s notice of no distribution. Time will tell.

What Events Can Toll or Stop The Clock for Reach Back Periods When Discharging Taxes in Bankruptcy?


There are a number of requirements to discharge taxes when filing for bankruptcy protection. Timing is everything. Taxes can be discharged if they taxes are three years old, filed on time or 2 years before the bankruptcy case was filed, assessed 240 days prior to the bankruptcy case, non-fraudulent return and no willful tax evasion. This article will not address the numerous issues that can arise regarding each of the requirements listed. This article focuses on what events can stop the clock or start the tolling of the different time periods. Your bankruptcy lawyer in your jurisdiction will be able to discuss how your state taxes are dealt with in bankruptcy.

Tuition Credits are not Student Loans

Tuition Credits are not Student Loans

For example, the due date for 2009 taxes is April 15, 2010. In theory taxes owed for 2009 therefore will be dischargeable after April 15, 2013, when filing for bankruptcy protection. So stops the clock on the three year period though? Or what stops the clock for the filed on time or return filed at least two years before filing for bankruptcy?

Bankruptcy Code Section 507(a)(8)(G) provides in part . . . . “applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.

Events that Toll or Stop the Clock From Running

1. Filing Bankruptcy: The first event is the filing of a prior bankruptcy case. As soon as the bankruptcy case is filed the automatic stay is in effect stopping any and all collection activity, including collection of taxes. The time period of three years and 240 days is not stopped since the governmental agency is prevented from attempting to collect the taxes. However long the automatic stay was in effect should be subtracted from the total days. Bankruptcy Code Section 507(a)(8)(G) also adds 90 days to the time period.

2. Request for a Hearing: Once you receive a letter in the mail from the IRS or FTB that you allegedly have unpaid taxes you may request a hearing to object or challenge the taxing authorities findings. Once you make this request the time period for looking back to determine if the taxes are dischargeable is tolled or stops. In addition once the event is over the time starts to run again 90 days must be added to the time period.

3. Appeal of Any Collection Action: This is more or less the same as making a request for a hearing. If the IRS or FTB levied on your bank accounts or informs you of a proposed assessment and you appeal the collection action or assessment the time period looking back is again stopped or tolled.

4. Offers In Compromise: If you make an offer in compromise it will stop the 240 day period while the offer is pending or in effect, plus 30 days. See Bankruptcy Code Section 507(a)(8)(A)(ii)(I). The trap here is if you had an offer-in-compromise in effect previously but no longer. The time the OIC was in effect must be calculated and added to the 240 day time period. Also, it only tolls the 240 day period with the taxing authority the offer was made to.

5. Extension to File Return: The Internal Revenue Service requires a form be filled out to obtain an extension of the deadline to file a tax return. Some states, like California, will automatically extend the deadline to file a return if not filed on time. This is an issue that needs to be looked at closely. Do not assume the federal tax time periods and deadlines are the same for whatever state taxes are owed as well.

The good news is that entering into an installment agreement with the Internal Revenue Service or Franchise Tax Board does not toll or stop the time periods. This is our recommendation also. If all else fails then enter into an installment agreement as soon as possible. Ignoring the taxing authority will only make matters worse. You do not want the government levying on your bank accounts, garnishing your wages or issuing tax liens on your real and personal property.

Bankruptcy Can Help Pay Back Unpaid Property Taxes in Alameda County and San Mateo County


Not to get too political, but do we Americans ever really own property in the United States? The structure of ownership is more like a lease from the government that can be increased. I consider my property tax to be a yearly lease payment. I will never really own the house or the dirt under it if it is located in the United States. Anyway, that is another story for another time.

How to Pay Back Unpaid Property Taxes

If you are behind on your property tax payments or have unpaid property taxes in Alameda County or San Mateo County we can help. Yes, your house can be foreclosed on and sold at auction if you do not pay your property taxes. So how can filing for bankruptcy protection help? First of all it will stop any tax sale from taking place. But filing a Chapter 7 Bankruptcy case will not help for too long. Filing a Chapter 7 case will not pay back the missed property tax payments and the taxing authority can ask the court for permission to continue with the foreclosure process.

To repay the property taxes you need to reorganize your debts by filing a chapter 13 bankruptcy that will allow you to spread out the missed payments over 36 or 60 months depending upon your circumstances. For example, if you owe $20,000 in unpaid property taxes they can be paid back at approximately $556 per month (plus interest, the trustee and attorney fees) or approximately $334 per month (plus interest, the trustee and attorney fees). These estimated Chapter 13 plan payments are assuming you do not have any other debts that must be paid back through the plan or have an obligation to pay unsecured creditors if any. This is just looking at if you owed property taxes. Under California law the interest rate should be 18% per annum. If you do not include 18% interest most counties will object to confirmation or approval of the Chapter 13 Plan. Interest is not included in the above estimated payments either. Most Chapter 13 Trustees’ fees average from 5% – 10% of the monthly plan payment. If the Chapter 13 Plan payment is $200 a month, then about $17.00 of the payment goes to pay the Chapter 13 Trustees’ fee. Most Chapter 13 Plans have part of the attorneys’ fees included in the plan so that you do not have to come up with all of the attorneys’ fee prior to the case being filed. In the Bankruptcy Court for the Northern District of California most divisions have a Rights and Responsibilities for that provides the attorneys’ fees that can be charged without having to file a full fee application for approval of the fees by the Bankruptcy Court. If there are $3,000 in attorneys’ fees as part of the plan, approximately $50 of the Chapter 13 Plan payment will go to your bankruptcy attorneys.

Property Tax Foreclosure Sales Do Happen

Not making your property tax payments is no joke. Just ask this poor soul who failed to pay a small amount of interest on her property tax payment. For $6.30 a tax sale was conducted and her home was sold. She was going through some difficult times, but she also did not open her mail and missed a number of notices. See Widow Who Lost Her Home.

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.

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:,,id=149373,00.html

IRS – if you owe more than $25,000:

FTB – if you owe less than $25,000:

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:



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.

How Does Receiving a Tax Refund Affect My Bankruptcy?

By Kitty J. Lin, Attorney at Law

With tax season here, many consumers have received or will receive a tax refund.  What happens to your tax refund if you have already filed bankruptcy, or will be filing for bankruptcy in the future?  It would depend on what stage you are at in your bankruptcy case.  Here are some scenarios:

You have received a tax refund and you have not filed for bankruptcy yet

It is very important that you communicate to your bankruptcy lawyers if you have not filed your tax returns yet and if you expect a refund. If you have already received a refund before you file your bankruptcy case, it would be considered an asset in your bankruptcy estate.  However, since you have not filed your bankruptcy case yet, if you require the funds from your tax returns for necessary expenses, such as food, shelter, utilities, property taxes, attorney fees, etc. you are free to spend it on such items.  If, after using your funds from your tax return for all the necessary items, you still have money left over, it will need to be included in your bankruptcy petition.  These funds will need to be exempted.  See Asset Protection in Bankruptcy for more information about California exemptions.

Your bankruptcy case is filed, but you expect or have already received a refund

If you have not received a refund before filing your bankruptcy case, whether you are able to keep your tax refund will depend on how much the exemptions you have available.  First, one of the most important aspects is to be sure that your expected refund (even if you have not received it yet) is listed on your petition.  If you have exemptions available, then it will be protected and you would be able to keep all of the exempted refund.  If you do not have any exemptions available, then the trustee may be able to take a pro-rated portion of your tax refund for the benefit of your creditors in the bankruptcy estate.

You expect to receive a refund, but it was not listed in your bankruptcy petition

If you know you will receive a refund but you intentionally decide to not disclose it in your bankruptcy petition, the bankruptcy trustee may require you to turn over the funds to the bankruptcy estate for the benefit of your creditors.

If you have any questions about the affects of a tax refund in a bankruptcy case, it may be advisable to speak with an experienced bankruptcy lawyer to go over your situation to be sure that all of your funds are protected.  You may contact us toll free at 877-9NEW-LIFE (877-963-9543) to schedule a FREE in person or phone consultation today.

Bankruptcy Lawyer: What to Know About Property Taxes

By Ryan C. Wood, Attorney at Law

As we begin 2011 the mortgage crisis has yet to come to an end.  Many homeowners are struggling to pay their mortgage and are forced to make very difficult decisions about who gets paid each month.  So what about property taxes in this mess?  What happens if property taxes are not paid?

Property taxes are secured by the property you own, just like the mortgage you agreed to when you purchased your home.  Unlike a credit card debt, personal loan or medical debt, property taxes and mortgages are not debts that you are personally liable for; they are only secured by the property itself.  If your house is foreclosed or short-sold you will not owe the unpaid property taxes to the county.

The next issue is whether you are trying to keep the house or not?  If yes, then you will have to pay the property taxes at some point.  If your property taxes have not been paid for a year or more, and you cannot make the lump sum payment, there is help.  The first thing you should do is contact your county to see what options are available for you to enter into a repayment plan.  Another option is to file Chapter 13 Bankruptcy to make paying back the property taxes affordable by spreading out the unpaid property taxes over three to five years.  See our Chapter 13 Time Line for more information about filing a Chapter 13 Bankruptcy.

What about taking a cash advance on a credit card or borrowing from a retirement account to pay property taxes?  Do not do it.  You can go for years without paying property taxes before your county initiates a tax sale.  As mentioned above, property taxes are secured by the property.  If the property is gone, so is your obligation to pay the property taxes and the property taxes that are past due.  So why take on debt from a source that will be with you after the property is gone.  Long after your property has been foreclosed on or short-sold you will still be making payments to the credit card or retirement account you borrowed the money from to pay your property taxes.  So if you are having trouble paying your bills each month, your property taxes should not be at the top of your list.  You should also not borrow funds to pay your property taxes.

For more information about property taxes and bankruptcy you may contact us toll free at 1-877-9NEW-LIFE.  We have offices located in Oakland, San Francisco, San Jose and Redwood City proudly serving those in need of debt relief.

Can Taxes be Discharged When Filing Bankruptcy?


The answer is maybe or it depends upon the circumstances.  The discharge of taxes when filing for bankruptcy under Chapter 7 or Chapter 13 is possible depending upon the type of taxes and a number of factors as discussed below.

If you have outstanding taxes owed to the Internal Revenue Service or Franchise Tax Board, seek the counsel of an experienced bankruptcy attorney for assistance.  The following is a complex explanation of the requirements that must be met to allow taxes to be completely discharged when filing for bankruptcy protection.

What Requirements Must be Met to Discharge Taxes?

If taxes are owed they are usually owed to the Internal Revenue Service or the Franchise Tax Board for the State of California. It is highly recommended that your bankruptcy lawyer obtain an account transcript from both the IRS and FTB. There are many different types of taxes.  This article is limited to income taxes that are owed.  Generally though, taxes are dischargeable or partially dischargeable in bankruptcy depending upon the circumstances.

Which chapter of the Bankruptcy Code will also effect if all or some of your tax obligation will be discharged.  In a Chapter 13 usually a portion of non-priority general unsecured debts are paid back to creditors in the Chapter 13 Plan over three to five years.  In a Chapter 7 bankruptcy all of the tax obligation may be dischargeable.

The Bankruptcy Code mandates that all priority debts must be paid back in full when filing for bankruptcy protection.  The key to discharging a tax obligation is when does the tax obligation no longer have to be classified as a priority debt?  Once the tax obligation can be classified as a non-priority general unsecured debt, it can then be discharged in bankruptcy.  Another key point is whether the taxing entity has already obtained a tax lien against your property?  If a lien has been obtained, then the taxed owed is a secured debt, and the tax then must be paid in full.

When Does a Tax Debt Become a Non-Priority General Unsecured Debt?

Taxes owed are classified as a priority debt until:

1)     the tax debt is over three years old from the date the taxes were due at the time the bankruptcy case is filed;  if your tax return   was due April 15, 2007, it would now be over three years old;

2)   the tax debt was accessed over 240 days prior to the filing of the bankruptcy case;

3)  the tax return(s) were filed on time or at least two years before the bankruptcy case was filed;

4)  there must have been no attempt to evade or defeat the tax by filing a false return.

To summarize, a tax obligation may be dischargeable in a Chapter 7 bankruptcy or Chapter 13 bankruptcy if the taxes were due at least three years prior to the filing of the bankruptcy case, accessed at least 240 days prior to the filing of the bankruptcy case, the tax return was filed on time or at least two years prior to the filing of the bankruptcy case and there was no fraud or intent to evade the taxes.  If these requirements are met, then the tax obligation is not a priority debt, but a non-priority general unsecured debt that may be discharged in bankruptcy.