Kentucky Bankruptcy Law

Counsel with Care

Say it, claim it – Chapter 13

Claims play a major role in Chapter 13 bankruptcies. They are essentially superfluous in a “no-asset” Chapter 7 so they are often not filed in such cases except for certain secured creditors. If there are non-exempt assets that will be liquidated (reduced to a monetary value by being sold) in a Chapter 7, then it is an “asset” Chapter 7 and claims serve a similar function as I’ll describe for the Chapter 13.

In a Chapter 13, a plan is proposed by the Debtor that spells out what the Debtor will pay in over time. The plan also describes how various creditors will be treated.  The categories of creditors typically include unsecured, priority unsecured (such as recent tax debt), administrative costs (such as attorney fees), and secured debt. Each category receives different treatment.

For a creditor to actually receive what is owed to them per the plan’s provisions, they must file a claim. There is a form available just for this purpose and the creditor can either send it in to the court clerk to be electronically filed or, if they have set up an account, they can file it electronically. The claims for most creditors (other than governmental agencies) must be filed by a deadline specified in the Notice that is sent out to all creditors when a bankruptcy is filed. If they miss the deadline, their claim will likely be denied and the full debt discharged (depending on the category of debt) as to the Debtor.

The claim also puts the Debtor on notice of any additional fees and penalties that the creditor may be entitled to receive under the loan contract or by law. It is up to the Debtor to review the claims and object to anything that is erroneous or to excessive fees. If a plan proposes to pay even unsecured debts at 100% of the claim, then it is even more important to scrutinize the claims and object to them if they are wrong. This could reduce the overall plan payment. However, there are hefty penalties to filing false claims so most of the ones I review are accurate.

May 2, 2013 Posted by | attorney fees, Bankruptcy, Chapter 13, Discharge, Proof of Claim | , , , , , , , , , , , | Leave a comment

Tax debts can be discharged! – sometimes

A common misconception floating about is that income tax debts can never be discharged. This myth arises from the reality that income tax debts have a favored position in the bankruptcy code. Also, trying to figure out which tax debts are discharged can be mind boggling even for attorneys. Frankly the entire bankruptcy code can be mind boggling since most provisions relate back to other provisions that one must read before the original provisional can be understood.

Plain English is a foreign concept to drafters of legislation. All that aside, to determine if your income tax debt can be discharged, start at 11 U.S.C. Section 523(1). Section 523(1) immediately directs you to to two other provisions. The pertinent one here being 11 U.S.C. Section 507(a)(8). Section 507(a)(8) then circles you back into Section 523 making for a dizzying ride. You are welcome to go to these statutes and read them for yourself. If you understand them, you are either a bankruptcy attorney or you missed your calling.

Let me break it down for you with a plain English translation. In order for an income tax debt to be discharged, all these requirements must be satisfied:
1) The tax return filing must have been due more than three years before you file your bankruptcy petition. If an extension was filed, then that moved the due date for your filing out so extension periods do not count towards that three years.
2) The taxes were either officially assessed more than 240 days prior to the bankruptcy petition or were not yet assessed but were assessable. I know, that last part does not seem to be in the statute but that is because of how this statute is worded. It is listing what tax debts are excluded from discharge as those assessed within 240 days of filing, so those not assessed or assessed (but assessable) outside of the 240 days are not excluded. Offers in compromise and stays in other proceedings toll this time period plus add on 30 or 90 days respectively.
3) A tax return had to have been filed.
4) If it was filed after the final due date, including extensions (filed late), it had to have been filed at least two years before the bankruptcy petition is filed.
5) There can be no fraud or attempts at evasion of the tax at any time.

In order to know calculate these items precisely, one must obtain a tax Account Transcript from the IRS. This can be obtained by filing a Form 4506T from your friendly Internal Revenue Service agency.

March 29, 2013 Posted by | Bankruptcy, Discharge, Tax Debts | , , , , , , | 1 Comment

Will I get to keep my tax refund?

The answer to this question, as with so many bankruptcy questions, comes down to timing. The set-off provision of the bankruptcy code, 11 U.S.C. 553, basically says that the bankruptcy code does NOT change the rights of the IRS (and certain other creditors/debts) to retain your tax refund. However, not only does the debt owed to the IRS need to already exist prior to the date your filed your bankruptcy petition, but your right to receive the refund had to arise before your filed the petition also.

This gets a little tricky because most people think their refund came about (or arose) when they filed their tax return. Actually, the right to receive that tax refund arises at the end of the taxable period. See 11 U.S.C. 362(b)(26). So, if you are filing a tax return on 4/15/2013, the right to receive the refund arose on 12/31/2012 because that was the end of the taxable period of 2012. The return on 4/15/2013 only quantifies (liquidate) how much is owed.

How this plays out is that if you owed taxes for the 2011 tax year and expect a refund for the 2012 tax year and you filed your bankruptcy petition on or after 1/1/2013, then the IRS will keep enough of your tax refund from 2012 to cover the debt owed from 2011. Any extra would be refunded to you. If there are still taxes owed from 2011, then they will either need to be paid in full in your Chapter 13 (because they would be priority debts – another post explains this) or they will still be there for you after a Chapter 7. Older tax debts may be discharged, but in this example they would not.

This is where advanced bankruptcy planning can help. If you already know you are likely to receive a sizable tax refund for the tax year you are currently in and you owe tax debt from a prior year, your best chance at keeping those funds is to file the bankruptcy before December 31.

March 1, 2013 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning | , , , , , , , , , , , , , | Leave a comment

I got a discharge in a Chapter 7, when can I file a Chapter 13?

I began looking a the time between Chapter 7s if one wishes to receive a discharge. The time frame is different when the subsequent case is a Chapter 13 showing the favored status of Chapter 13 bankruptcy. If the preceding bankruptcy was a Chapter 7 (or Chapter 11 or 12), then you cannot receive a discharge in a subsequent Chapter 13 if is filed four (4) years or less of when the Chapter 7 was filed. See 11 USC Sect. 1328(f)(1).

If  one gets a discharge of unsecured debt in a Chapter 7 but still has some non-dischargeable priority debt in income taxes, they may want to turn right around and file a Chapter 13 without waiting the four years because they will be paying the debt in full over the length of the plan. So, there is no need for the discharge. This is a strategy discussion to have with your attorne.

October 18, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Planning, Pre-filing planning | , , , , , , , | 3 Comments

Discharge tax debt? Yes, you can…

I had a phone conversation just last week with an attorney who was surprised to learn that income tax debt can be discharged. I guess he had not read my prior post about this topic. The mistaken belief that tax debts are with you forever is prevalent with lay people and attorneys alike. The bankruptcy code takes one through a bit of a maze to figure out if the tax debts in question are capable of discharge. The code provisions include: 11 USC Sect 507(a)(8)(A)(i) & (ii), 523(a)(1)(B) & (C), 1328(a)(2).

The condensed summary of these provisions includes:

  1. The due date for the tax return was three years ago or more.
  2. The tax return was actually filed two years ago or more.
  3. The tax assessment occurred 240 days ago or more or has not yet occurred.
  4. The tax return was not fraudulent.
  5. The taxpayer did not engage in tax evasion.

One needs to obtain a tax “Account Transcript” to be sure to calculate these requirements because certain things can “toll” or stop the running of these times.

July 27, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning | , , , , , , , , | Leave a comment

Are the fees you are paying your bankruptcy attorney fair?

I have addressed issues around bankruptcy fees and, more specifically, fees in a Chapter 13. As a result, I have spent considerable time contemplating how to make the fees I charge fair to the customer and fair to myself. The difficulty in this task is that many people calling around for a bankruptcy attorney just want to know a bottom line price. I have answered many calls where the one and only question I am asked is “how much do you charge for a Chapter 7 bankruptcy?” The only truly honest answer any bankruptcy practitioner can give is, “it depends.” But, that answer is most unsatisfactory to the customer and they will typically keep calling attorneys until someone gives them a quote for a rock bottom price.

The problem, of course, is that even if an attorney says “$750.00 for a Chapter 7”, that is not the end of the story. The customer will go in, do the paperwork, and discover that the real answer actually is, “it depends.” You see, the most important concept attorneys are taught in law school is “it depends.” Nearly every correct answer to a law school exam question has within it the idea of “it depends” even if those exact words are not used. That is because most answers to legal issues do depend on multiple variables; few things in law are really cut and dried or open and shut. If they were, society would not need lawyers. Hmm, maybe I should not have put that idea out into the public consciousness.

So, I have tried to narrow down those factors that affect the attorney fees in a Chapter 7. Obviously, narrowing down precludes having an all inclusive list, but the main factors I settled on were: 1) the number of creditors; 2) the nature of the case (consumer versus business related debt); 3) the existence of certain types of debt, such as tax debt; and 4) the expectation of reaffirmations of secured debt. The debtor that has primarily consumer debt and few creditors, no tax debt and no anticipation of reaffirming secured debts would pay well below my prior standard fee.

There are a few reasons why I settled on the factors. More creditors means both more time with data entry and an increase in the likelihood of unforeseen complications, including debtors accidentally overlooking one or two in the crowd. Consumer debt cases take considerably less investigation and strategizing than cases brought about as a result of business debts. Tax debts require additional work to determine whether they are dischargeable and increase the likelihood of complications. Finally, reaffirming secured debts takes additional work and creates a higher liability upon the attorney who certifies the reaffirmation.

Now, instead the highly truthful but incredibly unsatisfactory “it depends” I can ask four quick questions and tell the customer that, based on their answers (that is a necessary lawyer caveat by the way), the cost would be $x.xx.

March 12, 2011 Posted by | attorney fees, Bankruptcy | , , , , , , , | Leave a comment

Be cautious of debt solution centers

I just saw an advertisement for a debt solutions center that promises to settle your debts for pennies on the dollar. Many of these agencies are pure hogwash! What they do is have you pay in hundreds of dollars a month, charge huge fees, and then occasionally get a creditor to accept a lump some payment for less than you owe – usually for sixty pennies or more on the dollar (rather than just a few pennies). All too often, your money just disappears into a black hole and your debt situation ends up worse rather than better. Even when you do get a debt forgiven for less than what you owe, you get a nice surprise in January of the next year. Any debt forgiveness over $600.00 gets reported by the creditor as income to you. You have to pay taxes on forgiven debt and chances are money is still really tight for you and you don’t have the cash to cover the extra taxes.

So, you have paid huge fees to convert dischargeable credit card debt into non-dischargeable tax debt.

There are legitimate debt help agencies. One that I have had some experience with and feel good about is Apprisen Consumer Credit Counseling Service that I have mentioned before. They will sit down with you and tell you what relief you can expect and what your monthly fee would be and where it would go. The fees are distributed to creditors monthly. If, instead, the agency wants to just collect a large pool of cash with the notion that they may work out a lump sum payout, run away – run far, far away.

January 23, 2010 Posted by | Bankruptcy, Debt solution centers | , , , | 5 Comments