Posts Tagged With: Chapter 7

Afraid to File Your Taxes?

Trust me. I get it. Lots of us are afraid to file our tax returns – well, ok, afraid to prepare them may be closer to the truth; but, trust me, I get it.

– and it just got worse.

Not filing your taxes has always been bad. Filing late has always had some consequences, but most of them were manageable. Now, there is a new one.

In the last week of 2014 the 10th Circuit Court of Appeals handed down an opinion agreeing with an earlier decision from the 5th Circuit. So far, they are the only two circuits to hear this particular issue; and they agree. This is not good.

Here is the problem. Generally, speaking income taxes are dischargeable in a bankruptcy proceeding provided that they meet certain requirements. Like with anything involving either the Bankruptcy Code or the Tax Code (let alone both), there are more rules, limitations and exceptions to the basic rules than holes in Swiss cheese. Still, generally speaking, if the taxes meet certain age tests they are dischargeable in a bankruptcy filing – any chapter. Well, the 10th Circuit, following the 5th, has added a new wrinkle.

According to these Courts if the returns were filed so much as a day after they are due, the taxes on those returns are never dischargeable in a Bankrutpcy. Of course, if they are filed before the expiration of a properly granted extension, they are not late. If they are filed after the extension expires, however, or if no extension is granted; then, we have a whole new problem.

I have a case right now where a client has filed a bankruptcy, and taxes are a major part of the debt. I just went through every one of her tax transcripts. One of those returns was filed late. Anywhere inside the 5th or 10th Circuits the taxes on that return are not only not dischargeable in this Bankruptcy – they will never be eligible for a discharge. Oh, and the date on that return? Filed less than two weeks after April 15, and no request for extension was filed.

This seriously sucks.

Elaine

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Categories: Bankruptcy, Taxes | Tags: , , , , , , | Leave a comment

What If I Didn’t List Something. . . .

First of all, there is a huge difference between failing to list an asset, like that mineral interest you inherited from your Grandparents, and failing to list a debt, like a car loan. Either one is perjury, if the omission was intentional; and either one can be grounds for a finding of bankruptcy fraud or even a denial of discharge if the facts are right. So, you really do need to put some time and effort into making sure that your Schedules include all of your assets and all of your debts.

So, what happens if you missed something? Assets are a whole different issue, I will touch on another time. Let’s talk about not listing a debt. It can be easy to forget an old medical bill or there can be debts you don’t even know about. Let’s say you had a car repossessed a few months before the bankruptcy filing. You scheduled the repossession on your Statement of Financial Affairs, but you didn’t list the Creditor; because you didn’t realize that you were still going to owe them money.

The creditor doesn’t get notice of the bankruptcy, and a year or two later the creditor sues you for the difference between what you owed at the time the car was repossessed and the amount they got for the car (after subtracting repo fees, sale fees, reconditioning fees, etc, etc., etc.). So, a year or two after your bankruptcy you are being sued for thousands of dollars. Now what?

That depends. The first issue is which chapter you filed under. This assumes that you filed a Chapter 7 bankruptcy. The analysis for a Chapter 13 is quite different. The second issue is whether or not your Bankruptcy was an asset case or a no-asset case. In other words, whether or not your Trustee managed to distribute any money out to your creditors. Most Chapter 7 Bankruptcies are no-asset cases. The biggest variable, believe it or not, is where you filed your Bankruptcy.

If you filed your Chapter 7 Bankruptcy in Oklahoma (and this blog is always restricted to Oklahoma issues, since that is the only State in which I am licensed to practice), and it was a no-asset case; you’re almost home free. As long as the failure to list the debt was truly unintentional and in good faith, your liability for that debt was included in your discharge. That does not mean, however, that you can sit back and do nothing. The creditor has incurred collection costs as the result of your failure to give them notice. So, you need to take action ASAP to let them know about the Bankruptcy. The best way to do this is to contact your Bankruptcy attorney and have them send a letter to the creditor’s collection attorney explaining the facts, providing information about the bankruptcy filing and providing information on the law in Oklahoma as to the inclusion of omitted debts in a no-asset discharge. You can expect to pay for that service, but in my opinion it is money well spent. The last thing that you want to do is wind up facing a wage garnishment that could have been avoided or find that you may have waived some rights by allowing the creditor to continue acting out of ignorance of your bankruptcy filing. Remember, you have a duty to give notice of the bankruptcy filing to everyone you owe money to. Failing to do so does not necessarily leave you at the creditor’s mercy; but that does not mean it is completely without ramifications.

Elaine

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What if the Trustee Wants My STUFF?

I explain to my clients that a Chapter 7 Bankruptcy is a deal. If you (the debtor) have any non-exempt property of any value that the Trustee wants, the Trustee is entitled to it; and my clients are expected to put it on the front porch, with a red bow on it and invite the Trustee in for a celebratory drink when he comes by to pick it up. Why? Because, in exchange for whatever non-exempt property the Trustee chooses to administer, you get out of that pile of debt that drove you to my office in the first place. That’s the deal, and if that deal isn’t worth doing – then, don’t file. Bankruptcy is the old Pearl of Great Price story told in a different setting.

Sound harsh? It really isn’t. I practice exclusively in Oklahoma, and Oklahoma has very generous exemptions. Remember, the deal is only for non-exempt property and most of what we own is exempt in Oklahoma. The vast majority of all people who file for Bankruptcy in Oklahoma have no non-exempt property of any real value; and when they do there are generally enough legitimate pre-bankruptcy planning techniques to protect those assets.

Sure, occasionally, a client loses something. They always know the risks. We go over that extensively and in great detail. Sometimes, though, when going over the possibilities, I can’t quite get past the, “BUT THAT’S MINE” response.

So, here is the story I tell. I had a client who had a $2,000 red toolbox. It held specialized tools that really didn’t qualify as household goods (which are exempt), and they were from a former career, so they didn’t qualify as tools of the trade (which are also exempt), but the toolbox was red, and it was really spiffy. Client loved this toolbox, and he really didn’t want to think about any mean, old Trustee taking it. Now, this client also had over $70,000 in unsecured debt that he needed to get out of.

So, I asked him. “If someone offered you $70,000 for that tool box, would you take it?” He looked at me like I was crazy. Seventy grand for a $2,000 tool box? Well, of course, he would take it. That is a fabulous deal! Then his brain made the connection, and the previous look of worried panic turned into a grin.

Turns out his Trustee wasn’t nearly as impressed by that toolbox as the debtor was, and the debtor wound up getting out of the $70,000 in debt and keeping the toolbox; but I have used this story (details have been changed, of course) for years.

So, first of all, remember that most people who file for bankruptcy in Oklahoma lose no assets. Just about everything that any of us owns of any real value is exempt if you are using Oklahoma exemptions, but even if you do own something that isn’t exempt – is it worth a discharge of all of your debt? If yes, then congratulations on driving such a great bargain – $70,000 in debt in exchange for a shiny, red toolbox. If, on the other hand, it isn’t the best deal you’ve had in a long time; then, talk to your lawyer about other options. Remember, you always have choices; and it is your lawyer’s job to help you find them.

Elaine

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What if the Trustee Wants My STUFF?!?

I explain to my clients that a Chapter 7 Bankruptcy is a deal. If you (the debtor) have any non-exempt property of any value that the Trustee wants, the Trustee is entitled to it; and my clients are expected to put it on the front porch, with a red bow on it and invite the Trustee in for a celebratory drink when he comes by to pick it up. Why? Because, in exchange for whatever non-exempt property the Trustee chooses to administer, you get out of that pile of debt that drove you to my office in the first place. That’s the deal, and if that deal isn’t worth doing – then, don’t file. Bankruptcy is the old Pearl of Great Price story told in a different setting.

Sound harsh? It really isn’t. I practice exclusively in Oklahoma, and Oklahoma has very generous exemptions. Remember, the deal is only for non-exempt property and most of what we own is exempt in Oklahoma. The vast majority of all people who file for Bankruptcy in Oklahoma have no non-exempt property of any real value; and when they do there are generally enough legitimate pre-bankruptcy planning techniques to protect those assets.

Sure, occasionally, a client loses something. They always know the risks. We go over that extensively and in great detail. Sometimes, though, when going over the possibilities, I can’t quite get past the, “BUT THAT’S MINE” response.

So, here is the story I tell. I had a client who had a $2,000 red toolbox. It held specialized tools that really didn’t qualify as household goods (which are exempt), and they were from a former career, so they didn’t qualify as tools of the trade (which are also exempt), but the toolbox was red, and it was really spiffy. Client loved this toolbox, and he really didn’t want to think about any mean, old Trustee taking it. Now, this client also had over $70,000 in unsecured debt that he needed to get out of.

So, I asked him. “If someone offered you $70,000 for that tool box, would you take it?” He looked at me like I was crazy. Seventy grand for a $2,000 tool box? Well, of course, he would take it. That is a fabulous deal! Then his brain made the connection, and the previous look of worried panic turned into a grin.

Turns out his Trustee wasn’t nearly as impressed by that toolbox as the client was, and the client wound up getting out of the $70,000 in debt and keeping the toolbox; but I have used this story (details have been changed, of course) for years.

So, first of all, remember that most people who file for bankruptcy in Oklahoma lose no assets. Just about everything that any of us owns of any real value is exempt, but even if you do own something that isn’t exempt – is it worth a discharge of all of your debt? If yes, then congratulations on driving such a great bargain – $70,000 in debt in exchange for a shiny, red toolbox. If, on the other hand, it isn’t the best deal you’ve had in a long time; then, talk to your lawyer about other options. Remember, you always have options; and it is your lawyer’s job to help you find them.

Elaine

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Filing Fees – and They Say There is No Inflation

There are three things that you have to pay for when you file for bankruptcy. They are: the attorneys fee, the filing fee and the credit counseling fee. The attorneys fee is pretty self-explanatory. The filing fee is paid to the Court at the time that the case is filed. It will probably look like you are paying this to your attorney; because you will pay it by handing your lawyer the money; but your lawyer will then pay the Court when he files your case. The credit counseling fee is ultimately paid to the pre-petition credit counseling company that you use to do your mandatory pre-petition credit counseling course. This you may pay directly, and you may pay it to your lawyer so that your lawyer can pass it on. Regardless, ultimately, you are the one paying for these things.

What brought this subject to mind this week is that the Administrator of the Courts just announced an increase in filing fees. A bankruptcy filing fee is generally divided between the Court for services provided by the Court and its clerk and the Trustee for services provided in administering your case. This increase is all going to the Courts.

The two most common filing fees for consumer debtors both went up $29 apiece, which is a substantial jump. What makes this a bit of a shocker is that fees just went up in November, 2011. Here is how fees have changed over just the last few years.

………………..  3/2006                Pre 11/2011                          2011 – 5/31/2014                      6/1/2014
Ch. 7                   $209                         $299                                         $306                                          $335
Ch. 13                 $194                          $274                                        $281                                           $310

There are all kinds of reasons and explanations for the increases, but the bottom line remains that it is becoming more and more expensive to file for Bankruptcy. I’ve practiced in many areas of law during the last 24 years, and I remain very proud of the Bankruptcy bar’s dedication to keeping attorneys fees as low as possible. When you file a Bankruptcy, you are filing a highly specialized, Federal Court case; and in most cases it will be substantially cheaper than any other significant legal event you have ever been a party to.

Bankruptcy attorneys were the first to really embrace automation. We have gotten very good at efficiently explaining complex legal concepts to our clients. That is not to say that Bankruptcy attorney fees haven’t gone up. The 2005 Bankruptcy Reform Act pretty well doubled the amount of work required to file a Bankruptcy and sent the lawyer’s liability soaring. Needless, to say – fees went up. Although I will say that they haven’t gone up in this office since then.

Elaine

 

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Tax Refunds and the Bankruptcy Estate

Tax refunds present a couple of interesting points in a Bankruptcy filing.  This post is concerned with Chapter 7 filings.  Chapter 13 is a little bit different for a couple of reasons.  This is also rooted in Oklahoma law, and although the theory remains the same, the results can be very different in other States. 

When talking about tax refunds with my clients, the first thing I have to do is figure out exactly what we are talking about.  I long ago stopped asking my clients and just started looking at their most recent returns.  Clients tend to refer to that check they receive from the IRS (or electronic credit) as their tax refund, although in many cases, it is all kinds of other things.  A tax refund is literally the refund of money that the tax payer overpaid to the IRS during the course of the year.  Various tax credits are paid along with the refund, but they are money given, or credited, to the tax payer by the Government.  Some common tax credits are Earned Income Credit, Child Care Credit and recently the Making Work Pay Credit.  Those are not a tax refund, those are tax credits.  At this point my clients are generally rolling their eyes and muttering, “Whatever” under their breath thinking I can’t hear them.  Then, I get their attention.

You see, tax refunds are not exempt in Oklahoma.  That means that any tax refund that has accrued to a debtor at the time he files for bankruptcy becomes property of his bankruptcy estate — meaning his Bankruptcy Trustee gets the money, and the debtor doesn’t.  Earned Income Credit, however, is exempt; and the Debtor gets to keep that money.  It is about this point that eyes stop rolling and clients’ posture visibly improves. 

Let me explain.  A Chapter 7 Bankruptcy is a deal.  The Debtor agrees that if he has any non-exempt property that the Trustee wants to administer for the benefit of his creditors, the Debtor will put it on the front porch with a red bow on it for the Trustee to come get — and BE HAPPY ABOUT IT.  In exchange, the Debtor gets a discharge — meaning he gets out of the debt that brought him to my office in the first place.  If that deal isn’t worth doing, then don’t file a Chapter 7 Bankruptcy.  Now, in most cases my clients lose no property, because the list of property that you get to keep in Oklahoma (exempt property) is really very generous.  Most people who file in Oklahoma lose nothing but a whole bunch of ugly debt they didn’t want in the first place, but the most commonly lost asset in Oklahoma is a tax refund — because tax refunds are not exempt.  Earned Income Credit, however, is exempt; and so the Debtor gets to keep that.  Ah, yes, focused attention. 

Now, I am posting this in April — tax time; but this is a relevant topic all year.  Here’s why.  Any time a bankruptcy is filed, the Debtor creates what is called a Bankruptcy Estate, and he gives to that Estate everything he owns and everything he owes.  Then, the Debtor takes back all property that he is claiming as exempt.  The goal is to leave as much debt as possible trapped in the Bankruptcy Estate and as little property as possible.  The Debtor can take back his Earned Income Credit.  He cannot take back his overpaid taxes, those are trapped in his estate and belong to his Trustee to pay to his Creditors. 

Notice, that last sentence refers to overpaid taxes, not specifically to a tax refund.  That is why this is an issue that is relevant all year.  Let’s assume that a client is expecting a $4,800 tax refund.  That means he has overpaid his taxes at the rate of $400 a month ($400 x 12 = $4,800).  If he files for Bankruptcy on January 1, he will have overpaid to the IRS the whole $4,800.  Now, he probably can’t file his taxes and claim it for at least another month or two; but he is owed that money even though he doesn’t have it yet.  His right to that money passes into his estate the instant he files his Bankruptcy.  That means when he does file his tax return, that entire refund will belong to his Trustee for the benefit of his creditors — all $4,800 of it.  Ouch. 

Now, let’s assume that this same person files on July 1 rather than January 1.  At that point he will have overpaid his taxes by $2,400 (January – June = 6 months x $400 = $2,400).  Even though he can’t claim that money for another seven or eight months, he is entitled to it.  Think of this as a savings account that you could only withdraw from after the first of the year.  You still are entitled to the money you deposit, you just might have to wait a while to get it.  Well, your Trustee can wait a while too.  So, in this set of facts, if the Debtor files for Bankruptcy July 1 and gets a $4,800 tax refund the following February or March, he will be entitled to keep the excess, or refund, that he paid in after he filed his Bankruptcy on July 1.  The Trustee will be entitled to the excess paid in before July 1. However, to the extent that refund is Earned Income Credit rather than tax refund, the Debtor gets to keep it all, regardless of when he filed.

This illustrates several significant concepts central to the Bankruptcy system:  1.The nature of the Bankruptcy Estate; 2. The inclusion in the Estate of accrued interests in property; 3. The difference between exempt and non-exempt property, and how technical that distinction can appear to be; and 4. The role of the Trustee.

Of course, the moral of this story is don’t file a Bankruptcy shortly after the first of the year until your tax refund is back and spent.  Do, however, talk to an attorney in advance, however.  There are ways you can spend a tax refund right before you file that can cause bigger problems.  As this post should have pointed out, Bankruptcy is a complex and technical area of law, and there can be significant ramifications to deceptively routine transactions. 

Elaine

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Repeat Bankruptcy Filings

Most people have heard something about only being able to file a Bankruptcy every so many years.  I generally hear seven (which is the Biblical time period (Deut. 15:1).  Although, what most people are thinking of  is the time between Chapter 7 filings, and that is currently eight years.

The truth, like with most things, is more complicated.  I like to refer to the 2-4-6-8 rule.  This assumes, by the way, that every case filed ends in a discharge.  So, it is two years between a 13 followed by another 13 filing (although, you aren’t supposed to be able to complete a 13 plan in less than three years — hey, nobody every said the 2005 reform act made sense); four years between a 7 followed by a 13; six years between a 13 followed by a 7; and 8 years between two chapter 7’s.

So, I got a phone call this week from a man who has filed six Bankruptcies in the last 16 years.  That doesn’t compute.  First of all, only two of them were Chapter 7 cases.  Second, to date, none of the 13 filings have completed and resulted in a discharge — so, they never triggered the relevant waiting periods.

What causes that kind of repeat filing?  Despite what most people will assume, this kind of pattern generally includes a chronic health problem and at least a couple of periods of unemployment.  Those two things manage to cause the accumulation of medical debt, and periods of missed mortgage payments either during illness or following  a job loss.  The four incomplete Chapter 13 filings will almost always be caused by job losses, because you can’t make plan payments without regular income.

So, what does this tell me when I pick up the phone and encounter a would-be client who clearly has a history with the Bankruptcy Court?  The first thing I want to do is pull up his case history on the Court’s web site.  I want to see what was filed, when, and what happened to it.  Is he eligible for another filing, why did prior filings fail, have those problems been addressed, is there a compelling reason to try again?  These are the questions I begin with.

For the would be client there are a number of concerns.  First, is he eligible to refile?  Even if he meets the 2-4-6-8 rule above, if his most recent case was dismissed with a bar against refiling for 180 days (sometimes improperly referred to as a dismissal with prejudice); then, he has to wait out that 180 day period even if he has an aggressive creditor snapping at his heels.

Second, if he has been a debtor in at least one bankruptcy case in the last year, then the automatic stay will only last for 30 days when the case is filed unless the Judge agrees to extend it.  That requires notice to all creditors, an affidavit from the Debtor explaining why he should be given another chance; and possibly a hearing on the issue.  If the would be client has been a debtor in two bankruptcy cases pending in the last year, then there will be no automatic stay at all unless the Judge agrees to impose one.

Third, the would be client is going to have to convince me that he is worth taking on as a client; and he can expect that I will require considerably more cash up front than I would otherwise.  Of course, he may also have to convince the Court of his good faith if any annoyed creditor were to complain.

So, successive filings may be possible.  Oh, and you are always eligible to file a Chapter 13, you just may not be eligible for a discharge at the end.  The time periods above assume that the Debtor will need a discharge at the end of the case.  Without it, the Debtor will need to find a way to pay 100% of his debt in the Chapter 13.  That can be very useful, and a Chapter 7 filed with the intention of following it immediately with a Chapter 13 can be a very useful strategy for dealing with certain kinds of problems.  Oh, that is called a Chapter 20, by the way; and I will blog about it another day.

Elaine

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