Creditors’ expenses when you file for bankruptcy.

When you file a bankruptcy discharge, your creditors will receive paperwork and have certain responsibilities to abide by while your bankruptcy case is pending.  Some of these have special costs associated with them because the creditor has to employ its own legal counsel to file the proper paperwork.  Although most of these are absorbed as a “cost of doing business” without your even being aware of them, some costs can get passed on to you.  Most often, we see this with mortgage debts in Chapter 13 cases.
Not all of these are bankruptcy-specific.  In fact, you may have received notices in the past of extra charges being added to your mortgage bill to accommodate a wide variety of purposes, even if you have never filed for bankruptcy.  But, since the bankruptcy rules (FRBP 3002.1) require that mortgage lenders file notices of any post-petition fees that are charged, I thought it might be useful to go over what some of the most common charges are so they don’t come as a shock to you when you see them.
I’m also including the amounts set by Fannie Mae as the maximum allowed recovery for Fannie Mae loans.  These are not the maximum allowed fees – but in my experience – most creditors will charge roughly the same rates as seen here on the Fannie Mae guidelines.
Motion for Relief from Stay – $850
Proof of Claim – $650
Reaffirmation Agreement – $125
Notification of Payment Change / Notification of Fees – $50-100

Cancellation of Debt / Tax Return Filings

You’ve received a form 1099-C from one of your creditors for “cancellation of debt”.  What are you supposed to do with it?

  1. First and foremost, bring it to the attention of a tax professional – either an accountant, tax attorney, or other professional tax preparer.
  2. The federal government considers canceled debt to be income for tax purposes.  However, this is not always the case – there are exceptions – and sometimes canceled debt is not income that you have to pay taxes on.
  3. 26 U.S.C. § 108 controls when a canceled debt is or isn’t income.
  4. The good news is that if the debt was discharged in bankruptcy, it is not taxable income.
  5. If the debt was not discharged in bankruptcy (but canceled before you filed for bankruptcy), then it may or may not be taxable income, depending on whether a different exception applies. You should consult with a tax professional to determine if you qualify for an exception.
  6. Even if your debt was discharged in bankruptcy, don’t just ignore the 1099-C.  A tax professional can help you determine which forms you need to file – but start with IRS Form 982.  The IRS will also receive a copy of the 1099-C, and if the canceled debt isn’t mentioned on either your 1040 or on Form 982, you are going to trigger an investigation from the IRS.

So-Called “Medical Bankruptcy”

There’s no such thing.
Medical debts can be discharged in bankruptcy, but there isn’t a special type of bankruptcy for only medical bills or a special type for when most of your debts are medical bills.  No special protections, qualifications, bonuses, rewards, preferential treatment, or anything of the kind.
Medical debts are merely a type of unsecured debt, just like credit cards and payday loans.  There’s really not a whole lot special about them.
Just in case anyone was wondering or curious.

Discharging Tax Debts in Bankruptcy

Most people who owe taxes to the government cannot have those tax debts discharged in bankruptcy.  Although most tax debts are non-dischargeable, some actually can be discharged.  And while those dischargeable tax debts are the exception to the rule, those exceptions are worth knowing about.
Morgan King, an attorney from California, put together this handy little flowchart in 2011 that shows how to determine if a tax debt can be discharged and/or whether it is a priority or non-priority debt.  Whether a tax debt can be discharged generally depends on the type of tax that is owed and the age of the debt, although several other factors also come in to play.  While the chart itself is pretty straightforward, actually finding out the information to answer some of the questions in this chart is often more problematic.

And here’s the relevant statutory text:
11 U.S.C. § 523


(a) 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;

11 U.S.C. § 507


(a) The following expenses and claims have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for—
(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition—
(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
(ii) assessed within 240 days before the date of the filing of the petition, exclusive of—
(I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and
(II) any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case;
(B) a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition;
(C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity;
(D) an employment tax on a wage, salary, or commission of a kind specified in paragraph (4) of this subsection earned from the debtor before the date of the filing of the petition, whether or not actually paid before such date, for which a return is last due, under applicable law or under any extension, after three years before the date of the filing of the petition;
(E) an excise tax on—
(i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of the filing of the petition; or
(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition;
(F) a customs duty arising out of the importation of merchandise—
(i) entered for consumption within one year before the date of the filing of the petition;
(ii) covered by an entry liquidated or reliquidated within one year before the date of the filing of the petition; or
(iii) entered for consumption within four years before the date of the filing of the petition but unliquidated on such date, if the Secretary of the Treasury certifies that failure to liquidate such entry was due to an investigation pending on such date into assessment of antidumping or countervailing duties or fraud, or if information needed for the proper appraisement or classification of such merchandise was not available to the appropriate customs officer before such date; or
(G) a penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.
An otherwise 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.