11 U.S.C. § 507
For example, say you were doing fine with a mortgage and a car loan, but then you were involved in an accident and racked up $20,000 in medical bills, and now you can’t afford to pay everything. One possible strategy might be to use payday loans to “punt” the problem down the field. That’s a bad idea and will most likely cause you more harm. On the other hand, if you can scale back on other expenses and slowly pay down the medical debt – that’s likely to be more successful.
- Drawing from a 401(k) is going to trigger tax consequences.
- Borrowing from a 401(k) means you’re still paying on a debt, with interest. It’s the proverbial “robbing Peter to pay Paul” except in this case, you’re robbing yourself.
- The obvious: you’re depleting savings that is meant to carry you through your retirement.
- You’re doing so to pay a debt that may be dischargeable in bankruptcy, and using an asset that is fully exempt in bankruptcy. (In other words, someone who burns $10k of his retirement funds to pay a $10k credit card bill could have had the $10k debt paid off and fully retained his retirement money in Chapter 7.
- If you are using these funds to settle a debt (pay less than what is contractually owed), your credit will still be impacted negatively, and you are likely to have tax consequences as a result of the canceled debt.
- When exactly (i.e. what date) was your bankruptcy case filed?
- What chapter of bankruptcy did you file under? Chapter 7? Chapter 13?
- Was this bill listed on your bankruptcy schedules?
- When was the debt incurred (in this example – what was the date of service)?
- What is the billing address and the statement date?
- If the debt was incurred before your bankruptcy filing date, then it is a pre-petition debt.
- If the debt was incurred after your bankruptcy filing date, then it is a post-petition debt.
- If the debt was listed on your bankruptcy schedules, then check the address to determine if notice was sent out to the right place. Also check the statement date. If within a few days of your bankruptcy filing date, then this may be a harmless “letters crossed in the mail” situation. If the statement date is substantially after your bankruptcy filing date, then you are likely looking at a stay or discharge violation.
- If the debt was not listed on your bankruptcy schedules and you filed a Chapter 7 case that had no distributions (the trustee did not sell any non-exempt assets, recover any preferences, or void any transfers) and the debt was otherwise dischargeable, then the debt is discharged. (This is a result of case law called “Guseck” in the Eastern District of Wisconsin. If you filed bankruptcy in another district, a different result may occur.)
- If the debt was not listed on your bankruptcy schedules and you filed a Chapter 13 case or a Chapter 7 case that had distributions, then the debt is non-dischargeable under 11 U.S.C. sec. 523(a)(3).
- Post-petition debts are generally non-dischargeable with one exception.
- If you file Chapter 13, then later convert to Chapter 7, debts incurred between the filing and conversion dates may be dischargeable under 11 U.S.C. sec. 348(d).
(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;
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.
Stated another way, the Chapter 7 discharge is “good against the world,” including unscheduled creditors. The discharge is said to be good against the world in the sense that it applies to all unscheduled debts except those that are expressly made nondischargeable by § 523. In re Guseck, 310 B.R. 400, 402 (Bankr. E.D. Wis. 2004)