Arizona Bankruptcy Lawyer Blog

Yes. Income tax debt can be wiped away in bankruptcy.

The catch? The following requirements:

Basic Requirements:

1. The taxes must have become due more then three years prior to the bk filing. This means that you should count forward 3 years from the date the return was actually due. (Think April 16th plus 3)

2. The original return must have been filed more than 2 years before the bankruptcy. 2003 return filed June of 2007? The two year date would end up in June of 2009. What constitutes an "original return" can be a complicated issue so if the IRS filed a "substitute" return before you filed your own return, make sure and tell this to your lawyer.

3. The IRS must have "assessed" the tax more than 240 days before the actual filing of the bankruptcy. Assessment means that they entered it in their system as due and owing.

4. No fraudulent tax return. This will kill the dischargeability.

5. No effort to evade the tax. This may as well.

Many of my clients have serious tax debt as a result of late filed returns. Despite other options (offer in compromise) bankruptcy often ends up being the best option overall.

Even if the tax debt is considered dischargeable one big caveat remains. The IRS lien.

The IRS will typically record a tax lien with the County in which you or your property "resides". If the property has value, the lien remains "attached" to it after the bk (chapter 7) or during the bk (chapter 13). In a chapter 7, the lien still has value after the case is over.

In a chapter 13, the value of the lien must be paid through the plan.

Often, the result in both cases is that the underlying tax debt is gone, but the lien is worth as much as the IRS was owed to begin with.

If you are getting ready to file for bankruptcy and have tax debt, make sure and have your attorney review the lien(s) and compare them to your asset values to avoid a surprise.

Some Chapter 13 Bankruptcy Examples

The following are a few basic examples of the benefits a chapter 13 have provided some actual clients.

CLIENT #1

Client Name: Mr. "Christian" Location: Arizona Chapter: 13

Debts:

189743.00 - Unsecured credit card, medical bill, failed business related debt

162,000 - Home mortgage debt

15,500 - Car loan

Minimum Payments outside of Bankruptcy to maintain debt load - monthly

3197.24 per month - mortgages and all living expenses

280.00 per month car

5500.00 per month - debt service on all remaining debt

After Chapter 13 - Payment and Budget Breakdown - monthly

3197.24 living expenses including mortgages

676.00 Chapter 13 plan payment

Total paid to unsecured creditors:

6444.23

Difference in Monthly Payments

8977.24 - before chapter 13 total needed to service all debt

3873.24 - total needed to service all debt after chapter 13 filed

5104 - savings per month

Debt Discharged at end of plan

$176685.00

Non Exempt Assets Protected

$9000.00 value

CLIENT #2

Client Name: Mr. and Mrs. "Jones" Location: Arizona Chapter: 13

Debts:

183,000.00 - Unsecured credit card, medical bill, business related debt

102,000 - Home mortgage debt

15,900 - Car loan

Minimum Payments outside of Bankruptcy to maintain debt load

3647.00 per month - mortgages and all living expenses

280.00 per month car

4500.00 per month - debt service on all remaining debt

After Chapter 13 - Payment and Budget Breakdown

3647.00 living expenses including mortgages

1850.00 Chapter 13 plan payment

Total paid to unsecured creditors:

78562.00

Difference in Monthly Payments

8427.00 - before chapter 13 total needed to service all debt

5497.00 - total needed to service all debt after chapter 13 filed

2930.00 - savings per month

Debt Discharged at end of plan

$104,676

CLIENT #3

Client Name: Ms. "Redfish" Location: Arizona Chapter: 13

Debts:

20,000.00 - Unsecured credit card, medical bills

13,027.00 - Car loan

Minimum Payments outside of Bankruptcy to maintain debt load

1707.00 per month - mortgages and all living expenses

160.00 per month car

890.00 per month - debt service on all remaining debt

After Chapter 13 - Payment and Budget Breakdown

1707.00 living expenses including mortgages

501.00 Chapter 13 plan payment

Total paid to unsecured creditors:

1201.91

Difference in Monthly Payments

2757.00 - before chapter 13 total needed to service all debt

2208.00 - total needed to service all debt after chapter 13 filed

549.00 - savings per month

Debt Discharged at end of plan

$17273.00

CLIENT #4

Client Name: Ms. "Trout" Location: Arizona Chapter: 13

Debts:

97,000.00 - Unsecured credit card, medical bills

Minimum Payments outside of Bankruptcy to maintain debt load

2546.00 per month - all living expenses including rent

4500.00 per month - debt service on all remaining debt

After Chapter 13 - Payment and Budget Breakdown

2546.00 living expenses including rent

190.00 Chapter 13 plan payment for 36 months

Total paid to unsecured creditors:

4056.00

Difference in Monthly Payments

7046.00 - before chapter 13 total needed to service all debt and pay living expenses

2736.00 - total needed to service all debt and pay living expenses after chapter 13 filed

4310.00 - savings per month

Debt Discharged at end of plan

$93113.00

Non Exempt Assets Protected

$2000.00

To speak about your options contact an attorney with chapter 13 bankruptcy experience.

I am not very funny. My sense of humor is dry, and according to my wife and kids, can't really be described as a "sense of humor" at all.

I dream on occasion that I am a comedian, and everyone is laughing hysterically at my jokes. Great dreams.

I do like funny things though, and I find many situations to be quite humorous. I also "chuckle" quite well.

What made me think of this?

On occasion I will meet with a potential client who causes me to chuckle...but a different kind of chuckle, an "uncomfortable" one.

When does this happen? Whenever a potential client tells me of an asset with value and then immediately recants or talks about "hiding" it.

An example (fictional of course):

Me: Do you own any thing else of value?

Potential Client: A watch

Me: Is it a nice watch? Does it talk or something?

Potential Client: Yeah...a "Breitling"

Me: So.. not a timex?

Potential Client: Oh No....."Breitling" you know...aviator watch. GQ magazine spreads.

Me: So worth maybe a few thousand on the street?

Potential Client: Maybe

Me: Probably need to get the value. If it's important to you, you may want to consider using chapter 13 bankruptcy to protect it.

Potential Client: Protect?.....(thinking for a second) Oh you mean the non exempt asset thing. But aren't I entitled to a watch in a chapter 7?

Me: Yes, up to a certain value.

Potential Client: What if I say to the Court....or I mean what if it isn't mine? You know what I mean right?

Me: (After uncomfortable chuckle done quite well).....no.

Potential Client: My neighbor says he filed a chapter 7 bankruptcy and no one asked him about his Rolex or his baby grand piano?

Me: One of the worst things you can do when asking a Court of Law to move your debts into the trash can of history, is to be less than honest about your assets.

Potential Client: Why?

Me: (After another uncomfortable chuckle) Jail time.

Potential client: About the piano.....

Being silly to try and make a point is fun. Going to jail because of a lie isn't.

I have noticed an increased determination on the part of the U.S. Trustee's office and the Court system in general to root out the dishonest bankruptcy filers.

If you are considering bankruptcy, and have assets with value that may not be exempt in bankruptcy, call an experienced bankruptcy attorney to see if there may be a way to honestly protect the asset despite filing.

If you file for bankruptcy, all collection activity by creditors must stop with a few exceptions. The part of the law governs this is called the "automatic stay".

So if a creditor is trying to collect from your or sue you based on a credit card, medical, breach of contract or other debt, they must stop all activity against you once you file.

They can't file a lawsuit, continue in a lawsuit, record a lien, report the debt to the credit reporting agency or seize property without permission from the court.

What happens if the creditor does continue with collection activity after notice of the bankruptcy has been received? They have likely violated the automatic stay rule and can be sued by the debtor. They may also have to pay damages and attorney fees.

I always suggest that if a creditor who is barred from collection by virtue of the bankruptcy filing continues to contact one of my clients, that the client or our office provide the creditor one more "notice" of the bankruptcy prior to suing. This notice usually goes out by phone and/or via a certified letter.

Most creditors "get the picture" and discontinue the contact.

Unfortunately, some continue. A lawsuit is then appropriate and often even necessary.

There are exceptions to the list of creditors who are completely barred from collection activity which will be discussed in further posts.

If you are in a bankruptcy and a creditor continues to contact you even after you are sure they know about the bankruptcy, you will want to speak to your attorney about whether a lawsuit is a good idea.