Yearly Reminders

As we get our feet firmly planted into 2017, this is a courtesy reminder of periodic changes…

  1. If you own real estate and your bankruptcy case is not yet filed, you will need to provide a copy of your 2016 property tax bill (which would have been issued in December 2016).  If you previously submitted your 2015 tax bill, it is no longer useful.
  2. Although 2016 income tax returns are not due to the IRS and Wisconsin Department of Revenue until April 2017, Chapter 13 cases filed after December 31, 2016 cannot be confirmed until the 2016 tax returns are filed.  So, if you’re expecting to file a Chapter 13 case in the near future – file your 2016 tax returns ASAP.
  3. If you are filing Chapter 7, you should provide a copy of your 2016 tax returns if they are filed before your bankruptcy case is filed.  2016 tax returns will be required for any bankruptcy case filed after April 15, 2017.
  4. The winter moratorium on power shut-offs ends on April 15, 2017.  If you are delinquent on paying your utility bills, talk to a bankruptcy attorney now and get your case ready to file ASAP.  Do not wait until April to decide you need to do something – you won’t be the only person rushing to file to avoid a shut-off.

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.

2015 Tax Returns

This is a yearly reminder that Chapter 13 cases filed after December 31, 2015 cannot be confirmed until the debtors’ 2015 tax returns are filed with the appropriate taxing authorities, even though they are not due to the taxing authorities until April 15, 2016.

Although a bankruptcy case can be filed without the tax returns (only confirmation of the plan is held up), it is STRONGLY advised that the tax returns be filed before your case is filed, because there often is information on the tax returns that are relevant to your schedules, Means Test, and even the calculation of your plan payment.

If you need to file a Chapter 13 bankruptcy soon, file your tax returns as soon as possible.

If you have already file a Chapter 13 bankruptcy and your case is still pending, remember that you must send a copy of your 2015 tax returns to your attorney so they can be forwarded to the Trustee.  If you are required to submit one-half of your tax refunds to the Trustee, you must do so immediately upon receipt of your refunds.  If you are unsure of whether you are required to submit tax refunds, call your attorney or consult your copy of the Chapter 13 Plan.

Alternatives to Bankruptcy: is debt settlement a good idea?

Most people don’t want to file for bankruptcy, even if they have to.  There’s a lot of stigma attached to bankruptcy, and so people try to avoid it except as a last resort.  In the process of trying to avoid bankruptcy, people try certain alternatives.  Some of them are wise efforts.  Others – not so much.
Generally-speaking, efforts to modify your budget and living without incurring additional debt are the best way to try to avoid bankruptcy without causing yourself more harm.
One of the more common tactics people use is to try to settle their debts.  Is this a good idea?
Answer: it depends.  As with most complicated situations like this, your best options will always depend on the specific facts of your case.  No two people are identical, and what may work for one person is not always the best option for another person.  An experienced attorney can help you parse the pros and cons of various approaches to determine which is likely to be the best option for you.
What is debt settlement?  Let’s use an example to illustrate.  Let’s say you have a $20,000 credit card bill.  You’ve defaulted, and your creditor is worried that you will file for bankruptcy.  To try to tempt you to avoid bankruptcy, your creditor offers to settle your account for $7,000.  In exchange, they will forgive the remaining $13k balance.  Should you pay it?
  1. Since you’re not paying the balance as contractually required, debt settlement will still negatively impact your credit.  So, if both bankruptcy and debt settlement are going to ding up your credit, the question you have to answer for yourself is whether you want to spend $7,000 to wipe out $13,000, or spend a fifth of that to wipe out $20,000.  (Factors that will impact that decision include whether you have other debts besides this one credit card that will still weigh on your credit.  Remember that payment history and bankruptcy are not the only factors that affect your credit.  Your credit is also affected by debt to income ratios, number of open accounts, types of debts, length of credit history, residential and occupational stability, and the amount of available credit for use.)
  2. Although debts discharged in bankruptcy do not count as taxable income, debts forgiven in debt settlement are taxable.  Which means $7,000 may end up being closer to $11,000 after all is said and done.

Furthermore, in this example, you actually have to have $7k.  If you have that liquid, then that may be a feasible – perhaps even a wise – choice.  But if you don’t?  Then you have to set-up a payment plan.
Well, first of all, you’re not going to be able to set-up a payment plan with the creditor itself.  In exchange for offering to have $13k of credit card debt wiped out, they want a lump sum payment.  If you’re going to make them accept installment payments, then they’ll take the full $20k balance you owe, thank you very much.
For many people, the alternative then is to hire a “debt settlement firm”, which my clients have consistently found to put them in a worse situation.  Basically, a debt settlement firm acts as a middle-man, and little more.  They accept installment payments from you, trimming a chunk off the top to pay for their services.  They keep taking those payments until they have enough to settle with one of your creditors.  In the meantime, collections actions are continuing.  Interest and penalties continue to add to your balance, making it tougher to reach an amount sufficient to settle on.  And the settlement firms settle with creditors in an order to maximize how much time they have to spend working on your case and – accordingly – maximizing their fee.  Also, expect to have to pay the debt settlement firm additional fees (on top of their flat rates for operating costs) – a percentage of whatever debt gets canceled.  And then you STILL have to contend with the credit reporting and tax consequences.
Debt settlement is only a viable and wise course of action if you have the liquid cash to make the lump sum payment, and even then, you need to consider the credit reporting and tax consequences.  Even then, you should weigh what you’re spending on the settlement plus any debts you must still contend with, and weigh that against the cost and benefits of bankruptcy.

Update on Tax Claims in Bankruptcy and the ACA

This from our friend at the IRS:
Just wanted you to be aware that Internal Revenue Service Insolvency has now been tasked with collecting unpaid shared responsibility payments (SRP) in bankruptcy.  These are amounts owed by taxpayers who do not have coverage under the Affordable Care Act.  The Service is treating SRPs as excise taxes, so SRPs will be priority amounts under Bankruptcy Code section 507(a)(8) on our proofs of claim and for discharge purposes.  I don’t yet know how they will be designated (“type of tax”) on the claim.  There are a few differences on how SRPs will be handled compared with our other priority tax claims:

1.        There is no penalty associated with an SRP (interest does accrue at the statutory rate).
2.       We will file motions to lift stay on pre-petition offsets of pre-petition payments (in other words, Bankruptcy Code section 362(b)(26) will not apply) – so we’ll file motions to lift on all offsets of SRPs except post-petition offsets of post-petition payments.  I have not heard how we will inform debtors that we are holding their refund for SRPs, but I assume they can get that information on the “Where’s My Refund” feature of the website.
3.       We will file 1305 claims for SRPs.
4.       We will not file estimated claims for SRPs.

Let me know if you have any questions.  I’m sure we’ll be changing things as we go along.

Richard Charles Grosenick
Office of the Chief Counsel – IRS

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.

Tax Return Reminder

This is a reminder for all people who are in a pending Chapter 13 Bankruptcy case…
All debtors must submit a copy of their 2014 federal and state income tax returns to the Chapter 13 Trustee REGARDLESS of whether you are required to submit any portion of your tax refund.  (If you are not sure whether you are required to submit part of your tax refund, contact my office to confirm.)
My clients should send a copy of their tax return to my office prior to April 16, (or an explanation for the delay) so that my office has a record of the tax return submission.  I will then relay your tax return to the trustee’s office.

Scam Alert – Posing as IRS Agents

This an extension of my earlier post on debt collection scare tactics.  There has been increased activity recently of groups of scammers posing as IRS agents.

of anyone who threatens to have you arrested unless you make an immediate payment

This is an excerpt from the IRS alert

People have reported a particularly aggressive phone scam in the last several months. Immigrants are frequently targeted. Potential victims are threatened with deportation, arrest, having their utilities shut off, or having their driver’s licenses revoked. Callers are frequently insulting or hostile – apparently to scare their potential victims.

Potential victims may be told they are entitled to big refunds, or that they owe money that must be paid immediately to the IRS. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.

Other characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

End-of-the Year Reminders

  • Debtors who have not yet filed for bankruptcy and own real estate – you should be receiving your 2014 property tax bills within the next couple of weeks.  If you have previously submitted your 2013 property tax bill to my office for review in preparation to file, be aware that you should update your file with the 2014 tax bill once received.  This will be mandatory on or after 1/1/2015.
  • Debtors who have not yet filed for bankruptcy but intend to file under Chapter 13 – if you hope to file in early 2015, be advised that Chapter 13 Plans cannot be confirmed without the current year’s tax returns on file.  Even though your 2014 taxes are not due to the taxing authorities until 4/15/2015, they will be required for confirmation of your Chapter 13 Plan if you file on or after 1/1/2015.
  • Debtors who have already filed Chapter 13 Bankruptcy – remember to submit your 2014 tax returns to my office so I can relay them to the Chapter 13 Trustee.  Those of you who are required to – remember to submit one-half of your income tax refunds.  If you’re not sure whether you have that requirement, call my office or consult the most recent version of your Chapter 13 Plan.
  • If you have defaulted on your energy bill during the more expensive winter months, remember that the winter moratorium ends on 4/15/2015, after which, your utilities can be disconnected.  If you need the bankruptcy stay to prevent a utility shut-off, please consult with me well before 4/15/2015.  Bankruptcy cases take time to prepare, and you’re probably not the only person who will be facing a shut-off.  Also remember that Chapter 128 is no longer a viable option to stay a disconnection of utilities.

Can I file bankruptcy against my tax debts?

Many people who are suffering from burdensome debt also count, among their creditors, the Internal Revenue Service and the Wisconsin Department of Revenue.  They wonder what – if anything – can be done about their tax debt.
To answer this question, we look to 11 U.S.C. § 523 – the statute that describes the types of debts that cannot be discharged.  § 523(a)(1) describes certain types of taxes that cannot be discharged in bankruptcy – the most common of which are being income taxes that are further described at 11 U.S.C. § 507(a)(8).  When you boil away the excess verbiage, § 507(a)(8) is basically describing income taxes owed for tax returns that were due within 3 years of filing.
For example – today is July 7, 2014.  Taxes owed for 2011, 2012, and 2013 would generally be considered priority taxes, and therefore non-dischargeable.  Notwithstanding any tax liens that may exist, any remaining tax debt would be considered non-priority, and dischargeable.
Now, there are a handful of ways for older tax debts to still retain priority status (the excess verbiage we boiled away) – such as any new assessments in the past 8 months, if the tax returns were filed late, or if there was a prior stay of collections.
So what does all of this mean?  Well, in Chapter 7 – the result is fairly simple.  Priority tax debts are non-dischargeable and will survive.  Non-priority tax debts are dischargeable (though tax liens will survive) and will go away after bankruptcy.
BUT – just because your tax debts are non-dischargeable doesn’t mean you can’t do anything about them in bankruptcy.  In Chapter 13, priority tax debts can be rolled into the plan.  Generally, they are paid in full with no additional interest (the taxing authority may – in rare cases – stipulate to be paid less than in full of their priority claim, though that stipulation will usually include a provision asserting that the unpaid portion will remain non-dischargeable and survive the bankruptcy).
By the way – what’s true of priority taxes is also true of other priority debts, such as domestic support obligation (child support, alimony, or maintenance) arrears.  Other non-dischargeable debts can also be folded into Chapter 13 bankruptcy, such as student loans.  But since student loans are not a priority debt, they do not have to be paid in full (though the unpaid balance would survive the bankruptcy).
If tax liens have been filed against you, those would also have to be paid in full in a Chapter 13 Bankruptcy (and with nominal interest), but they are secured only to the extent that there is equity in property.  For example, say that a person has a $100k house with an $80k mortgage, a $20k car with a $15k lien, and $10k in personal property – the available security would be ($20k + $5k + $10k) = $35k.  If the amount of tax lien is less than $35k, then the whole amount is treated as secured.  If the amount of the tax lien is more than $35k, then only $35k of it is treated as secured.
It’s a lot to digest, and worthy of a detailed discussion with your bankruptcy attorney.  But the main points to take away are that (1) some tax debts can be discharged in bankruptcy, and (2) tax debts that cannot be discharged can be addressed in Chapter 13.