Cases of Note: Fahey; and whether certain taxes can be discharged in bankruptcy.

Most people assume that taxes cannot be discharged in bankruptcy.  While it is true that some taxes cannot be discharged, some can.  11 U.S.C. § 523(a) reads as follows:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(1) for a tax or a customs duty
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, or equivalent report or notice, if required

(i) was not filed or given; or

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

For purposes of this discussion, I’m not going to go through a detailed analysis of § 507 nor discuss how the outcome is different if filing under Chapter 7 or Chapter 13 (though it is worth noting that taxes – even non-dischargeable taxes – can be folded into a Chapter 13 bankruptcy case, just like child support arrears and student loan debt).  Suffice it to say, taxes that are more than 3 years old are generally dischargeable, provided that one of about a half dozen exceptions doesn’t apply.  Whether a tax is dischargeable or not is intensely fact-specific, sometimes not entirely knowable in advance, and certainly not worth the effort of walking through all of the various contingencies.
What I do want to discuss is the hanging paragraph at the end of § 523(a)…
For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.
The First Circuit Court of Appeals has recently handed down a decision In re: Fahey, joining Fifth and Tenth Circuits in holding that taxes due for a retun that is filed after the date which the return is due cannot be discharged because a late-filed return does not meet the definition in the hanging paragraph, DESPITE § 523(a)(1)(B)(ii)’s apparent directive to the contrary.
Wisconsin falls within the 7th Circuit, so these rulings do not yet affect cases filed here.  Some courts have held to the contrary of Fahey.  If any of them is affirmed by their respective Circuit Court of Appeals, then a circuit-level split will occur which makes it likely that the U.S. Supreme Court will step in to resolve this question.

The lesson?

Even if this patterns ends up reversed, § 523(a)(1)(B)(ii) will still prohibit discharge of late-filed returns filed within the past two years.  If you owe the IRS or your state department of revenue money for taxes and you can’t afford to pay those taxes, you achieve nothing by postponing the filing of your tax return or not filing your tax return at all.

File your tax returns by the due date.  Worry about paying the taxes later.  At the very least, by filing your returns on time, you open up more avenues of resolution down the road, especially if you ultimately end up filing for bankruptcy.  If you file your returns late – at the very best, you’re forcing yourself to have to wait even longer for them to be dischargeable, and at the very worst – you may be ensuring that they are never dischargeable.

Snowballing Effects

John Oliver discussed municipal fines, how they can snowball, and how said snowballing disproportionately affects people of low income.  It’s not just that poor people have a harder time affording things, but that they are punished for it – and ironically, they are punished financially. Minor offenses should not completely ruin someone’s entire life.

He has also produced really good segments concerning payday loans and student loan debt.

If you find yourself unable to get ahead, find out how bankruptcy may be able to help you break the cycle.

Median Income Levels eff 4/1/2015

The Census Bureau has updated the median income levels.  These new numbers go into effect April 1, 2015.  Median income levels are dictated by the state you reside in and the size of your household.  If you are below median, you are presumed to qualify for Chapter 7 Bankruptcy.  If you are above median, you are presumed to need to file under Chapter 13.  Both presumptions can be refuted under certain circumstances.

The median income levels for Wisconsin will be as follows:
Household of 1: $43,666

Household of 2: $59,740
Household of 3: $69,600
Household of 4: $83,686
+1: +$8,100
Also, due to standing weekly obligations, office hours on Tuesday end at 6:30pm and on Friday at 4pm.  These hours have actually been observed for quite some time, but now they’re official.

Continued Gradual Increase in Foreclosure Filings

Although foreclosure cases were down statewide by about 3% in February, February was a shorter month and on a per day basis, foreclosures were actually up by over 3 cases per day over January.

Not taking the shortened month into consideration, foreclosure cases were up 3% for the month in northeast Wisconsin and up 22% in Brown County.

If your home is in danger of foreclosure, call me today at 920-490-6160 to find out how I can help save your home.

Before Filing Bankruptcy – Common Mistakes When Talking to Creditors

You’ve hired an attorney to file for bankruptcy, but your bankruptcy case isn’t filed yet.  You still have to pay your attorney, gather documents and information that your attorney needs to file, and sign the petition and schedules.
Although the process from retaining an attorney to actually filing for bankruptcy doesn’t have to take a long time, there is going to be a period of time in between those two events, and during that time you’re going to get calls from bill collectors.  What do you say?  What don’t you say?
Obviously, follow the instructions of your attorney.  If you are one of my clients, this is what you say:

I have retained an attorney to file for bankruptcy.  His name is Greg Holbus.  Please call his office at (920) 490-6160 to discuss my account.

That’s it.  Short.  Simple.  Sweet.
How can you screw this up?
Not Answering the Phone
Some people refuse to answer the phone when a bill collector calls.  Why?  Your bill collector is attempting to either get a payment from you or gather information from you.  If the bill collector is unable to get either, he’s not just going to give up.  He or she will accelerate their collection efforts – often by filing a lawsuit.
Although creditors are free to file lawsuits until your bankruptcy case is filed, most creditors won’t bother once they have been able to confirm that you’ve hired an attorney for bankruptcy.  It costs them time, money, and energy, and what will they get for their effort if your bankruptcy case is filed before they can collect?  Nothing.
So don’t leave them in the dark.  Answer the phone and tell them to call your attorney.  You’d be surprised at how much your telephone will stop ringing!
“I filed for bankruptcy.”
Did you?  Or have you only retained an attorney for bankruptcy?  Hint: if you haven’t yet signed a 60-80 page document and been given a case number (formatted as 15-00000), hearing date, hearing time, and hearing location – chances are your case is not yet filed.  Retaining is not the same thing as filing.  Retaining means that you have hired an attorney to do the necessary work to prepare a case for filing.  If creditors call you and ask, make sure that you’re telling them that you’ve “filed bankruptcy” only after you’ve actually filed bankruptcy.  Beforehand, you have merely “retained an attorney to file bankruptcy”.
Giving Your Life Story
Believe me, I understand how important someone’s story is.  They’re about to go bankrupt – it isn’t likely to be the high point in their life, and people take refuge in thinking about everything that happened to them that forced them to this point.  Many people are forced to file for bankruptcy through no fault of their own – victims of unfortunate circumstances.
That being said, circumstances aren’t often very relevant.  And as incredible as you may believe your story to believe, I guarantee you that your debt collectors have heard the same story hundreds of times before.  Sharing your story isn’t likely to get you very far, yet you’ll be forcing yourself to revisit painful memories.  It’s best to think ahead and think positively.
Being Hostile with Debt Collectors
I get it.  A lot of debt collectors are rude.  The temptation to retaliate and be rude back to them is overwhelming.  I would never defend their rudeness, nor dismiss your desire for retribution.
But what’s it going to achieve?  What do you hope to accomplish?
Remember that debt collectors are people doing a job.  Their job is to get money or – if they can’t get money – to get information.  Individual collectors may be working on dozens or even hundreds of accounts each day.  You’re probably not the only person they’ve called today who has been rude to them.  They’re tired and irritable.  If you get hostile with them, they’re likely to respond in kind, and it’s only going to create a feedback loop that gets worse and worse.
Bear in mind that it’s a human being on the other end of the phone.  Bear in mind that they’re doing a job.  Bear in mind that you’ve defaulted on an obligation and they have a right to attempt to collect on their debt.  You don’t have to be nice.  But be respectful.  Don’t get into a shouting match with them.
Yeah, some of them will still act like pricks.  But you’d be astonished at how many of them treat you with respect if you stand out as one of the few people they’ve dealt with all day who didn’t throw a fit.
Making Payments
I wish that this went without saying, but it doesn’t.  Many people will feel pressured to make payments and finally cave in and make the payment.
Unless your attorney has explicitly instructed you to pay on certain debts, never make a payment or give payment information (such as bank account numbers or credit card information) to a debt collector.  If you’re not sure, consult with your attorney before making a payment.

Reaffirmation Agreements That Never Were

Scenario:  John Doe filed Chapter 7 Bankruptcy in 2013, discharging about $60k in unsecured debt while reaffirming on his mortgage and car loan.  He has never missed a payment since his bankruptcy case was filed.  Now, 2 years later, he has pulled his credit report and is dismayed to find out that while his auto loan payments have been reported, his mortgage payments have not.  As a result, his credit score hasn’t improved as much as he would have hoped by now.  He calls his bankruptcy attorney and finds out that while he entered into a reaffirmation agreement on the auto loan, he did not enter into such an agreement on the mortgage.  Instead, he was doing what is referred to as a “ride through” – making payments sans a reaffirmation agreement.
Why is this happening?
To be honest, we’re not really sure.  Last October, after the conclusion of the Annual Bankruptcy Update in Milwaukee, I had a discussion with 7 other attorneys concerning a lender’s requirement to report payments with or without a reaffirmation agreement.
On the one hand, the Fair Credit Reporting Act (FCRA) only requires creditors to make accurate reports to the credit bureaus.  It does not, however, confer an affirmative duty to report at all.  In other words, any creditor can choose to report or not report, but if they do report, those reports must be accurate.
There was nothing in either the FCRA nor the bankruptcy code that any of us were aware of that indicated that lack of a reaffirmation agreement meant that a lender could not report payments, nor that filing a reaffirmation agreement forced a lender to report payments.  (In fact, it is entirely possible that payments might not be reported, even if a reaffirmation agreement is filed.)
It just seems to be “the way it is” – a matter of convention and policy rather than law.  At least one attorney reported being told by a creditor that the creditor’s policy was to not report without a reaffirmation agreement because to do so would be a violation of the discharge injunction.  Not only do we feel that argument is specious, but the inducement that creditors are making (no reaffirmation, no reporting) might itself be the bigger violation of the discharge injunction.
To the best of my knowledge, this has not yet been litigated in this district.
Can a reaffirmation agreement be filed now so that my payments get reported?
No.  At least, not in the Eastern District of Wisconsin.  The judges here (and I imagine in most districts) have a very strict policy that reaffirmation agreements will not be approved if they are entered after the discharge order is issued, and that cases cannot be reopened for this purpose.
Whose fault is this?
Usually, it’s nobody’s fault.  Reaffirmation agreements are voluntary agreements between a debtor and creditor.  A creditor cannot force an unwilling debtor to enter into an agreement, nor can a debtor force an unwilling creditor to enter into an agreement.
Unless someone deliberately obstructed transmission of the agreement, or if the debtor failed to notify the creditor of their intent, or if the creditor simply neglected to draft the agreement – there is no blame.
Why didn’t my bankruptcy attorney draft the reaffirmation agreement?
I have yet to meet a single debtor attorney who drafts reaffirmation agreements.  And I think we all refuse to draft them for the same reasons.  Reaffirmations are agreements between the creditor and debtor.  I’m happy to review the agreement, advise in favor of or against signing the agreement, and signing off on the agreement when appropriate.  But the agreement should still be drafted by one of the parties to the agreement.  And the creditor has access to contractual information (interest rates, maturity dates, current payoff balances, etc.) necessary to properly complete the agreement that the debtors’ attorney may not have access to (at least, not all of the information).
This is the worst thing ever!
Not necessarily.  Reaffirmation agreements turn otherwise dischargeable debts into non-dischargeable debts.  Yes, secured debts like mortgages and auto loans are dischargeable and presumed to be discharged in the absence of a reaffirmation agreement.  One of the nice things about a ride-through is that it allows you to retain your property without assuming the risk of having to pay a deficiency if you ever default and have your property repossessed.
In other words, let’s say a year after you file for bankruptcy, you default on your mortgage payment.  Without the reaffirmation agreement, the lender is only empowered to foreclose the property.  They cannot collect a balance from you.  With the reaffirmation agreement, they can foreclose AND collect a deficiency balance from you.
In fact, the only good reason to sign a reaffirmation agreement is for the credit reporting to help rehabilitate your score.  But there are other ways to rebuild credit.
I still want my payments reported, gosh darn it.
You have a couple of options, but none guaranteed to work.
  1. Talk to the lender.  Ask them to report your payments.  (This works better with smaller local banks and credit unions than it does with the big banks.)  If the creditor failed to provide you with an agreement – tell them that you would have signed the agreement if they had drafted one.  Since they chose not to, it’s hardly fair to punish you for their inaction.
  2. Refinance.  This is going to be difficult without the payment history to help rebuild your credit.  If you’re refinancing with the same lender – many of them refuse to refinance because of the lack of the reaffirmation agreement (which is really stupid, because with the refinance, they have a legal claim to the money; without it, they do not).
  3. Dispute the lack of reporting with the credit bureaus.  This has been suggested by a few attorneys.  Gather evidence of all of your post-petition payments and send them in to TransUnion, Experian, and Equifax.  Explain that your payments haven’t been reported because a reaffirmation agreement was not filed.  The problem with this approach is that – if you’re disputing a credit reporting error – there’s no error to correct.  Again, FCRA only requires that creditors report accurately, it does not require them to report at all.  Even if the credit bureaus do amend your report to show the payments, it still doesn’t mean that your lender will report payments going forward, which means that you will have to continually update the bureaus yourself.