Chance M. Mc Ghee | San Antonio Bankruptcy Attorney
Filing for bankruptcy is a major life decision that requires the assistance of an experienced and knowledgeable attorney. At the Law Offices of Chance M. McGhee, that is exactly what you will get. Attorney Chance McGhee has over 18 years of experience helping people from all backgrounds get the fresh financial start they need through bankruptcy.
The modern business world is tough, especially for smaller firms. If your small business has run into serious financial distress, you are far from alone. Right now, it may be time for your company to review its available options, to work towards shedding or restructuring some of that overly burdensome debt. Bankruptcy is one option that is on the table for your company. However, it is certainly not the only option and it is not always the best option. Here, our experienced San Antonio business bankruptcy attorneys offer tips for weighing whether or not it is time for your small business to file for bankruptcy protection.
Know Your Situation, Know Your Finances
When your business is facing financial distress, it is time to take a very hard look at the books. You need to know your finances, your assets, your debts and your projected future revenue like the back of your hand. Indeed, the key to making the best possible decision is knowing the true financial standing of your company. It is imperative that you enter the debt restructuring process with full knowledge and a clear head.
Always Consider Non-Bankruptcy Options First
Filing for business bankruptcy is a big step. It is neither right nor necessary for every financially distressed Texas small business. Our firm focuses on helping businesses find the best available solution for their individual needs. We always carefully consider all available non-bankruptcy options first. Your company may be able to get back on firm, stable financial footing with a less disruptive method, such as debt consolidation or voluntary debt restructuring. If you go down this road, our attorneys can help you negotiate the terms of these agreements.
Make an Honest Assessment
Finally, small business owners will need to make an honest assessment of the state of their business. While bankruptcy is not the appropriate legal tool for every financially distressed company, it is necessary in many cases. Further, waiting too long to file for bankruptcy may result in your business falling into an even bigger financial hole, making it very difficult to restructure and dig yourself out. The bottom line: If your small business is facing serious financial troubles, you need to take action now. The sooner you address the problem, the better off your company will be.
Request Your Free Business Bankruptcy Consultation
At the Law Offices of Chance M. McGhee, our passionate San Antonio business bankruptcy attorneys have extensive experience serving the unique needs of small businesses. If your small business is facing significant financial distress, we can help. Please do not hesitate to contact us today to set up a free review of your case.
Being accused of defrauding a creditor is unusual in consumer bankruptcy cases. A creditor would have to jump through significant hoops.
Most Debts are Discharged (Permanently Written Off) in Bankruptcy
The federal Bankruptcy Code has a list of the kinds of debts that are not discharged. This list details the conditions under which these kinds of debts don’t get discharged. (See Section 523 on “Exceptions to discharge.”)
Essentially, all your debts get discharged unless any of them fit one of the listed exceptions.
The Fraud Exception
One of the most important exceptions to discharge is the one stating that debts, “to the extent obtained, by… false pretenses, false representation, or actual fraud,” might not be discharged. (Section 523(a)(2)(A) of the Bankruptcy Code.)
This is an important exception to discharge because it could apply to many different kinds of debts. The other exceptions to discharge apply to very specific categories of debts. For example, these other exceptions include child and spousal support, various taxes, and student loans. But the fraud exception could apply to just about any debt if it was incurred in a fraudulent way.
What Makes for a Fraudulent Debt?
Your creditor would have to demonstrate that its debt should not be discharged because you incurred that debt fraudulently. If the creditor fails to do so the debt WILL get discharged and you’ll no longer legally owe it.
To avoid discharge of the debt, the creditor would have to present evidence and prove EACH of the following:
you made a representation
which you knew at THAT time was false
you made that representation for the purpose of deceiving the creditor
the creditor relied on this representation
the creditor was damage by your representation.
a person gets a loan by representing that he or she has a certain amount of income
while knowing that income amount was inaccurate
with the purpose of fooling the creditor into making the loan
resulting in the creditor relying on this income information in making the loan
and losing money when the person didn’t pay back the loan
What Happens When a Creditor Alleges Fraud
Proving all five of these necessary elements often isn’t easy. So creditors tend not to object unless they believe they have a strong evidence of fraud. In the vast majority of consumer bankruptcy cases no creditors raise any fraud-based challenges.
When a creditor does raise such a challenge it does so in a specialized lawsuit in the bankruptcy court. This “adversary proceeding” usually focuses directly on whether the creditor can prove the five elements of fraud.
Such adversary proceedings almost always get settled. That’s because the amount of money at issue doesn’t justify the expense in attorney fees and other costs that can accrue quickly for both sides.
Staying Allegedly Fraudulent Debts
The “automatic stay” imposed against virtually all creditor collection action also applies to allegedly fraudulent debts. If the creditor has alleged fraud prior to your bankruptcy filing, the filing will at least temporarily stop all collection on the debt. The “automatic stay” stops “any act to collect, assess, or recover a claim against the debtor.” (Section 362(a)(6) of the U.S. Bankruptcy Code.)
Then, as mentioned above, the debt will either get discharged or not. If the creditor doesn’t file an adversary proceeding in time, the debt DOES get discharged. If the creditor files an adversary proceeding but then doesn’t prove fraud, the debt is discharged.
On the other hand, if the creditor does prove fraud the debt is not discharged and the creditor can then pursue the debt. It gets a judgment stating that the debt is not discharged and collectible. Then the creditor can use all the usual collection methods to collect the debt.
However, because these matters are usually settled, the settlement usually includes an agreed payment plan. So in the unlikely event that a creditor DOES allege fraud against you, files a timely adversary proceeding, AND convinces the bankruptcy judge that all the elements of fraud were present, you would still very likely have a workable way to pay the debt without worrying about being hit by unexpected collection actions.
Qualifying for “undue hardship” to discharge (write off) student loans is not easy. But Chapter 13 gives you powerful help over the timing.
The Much Better Chapter 13 “Automatic Stay”
Last time we explained how bankruptcy’s “automatic stay” immediately stops student loan collections against you. But if you file a Chapter 7 bankruptcy this protection from collections lasts only the 3-4 months that the case lasts. If you qualify under “undue hardship,” you could discharge (write off) your student loan debt during your case. Then the student loan creditor could no longer collect that debt.
But if you can’t show “undue hardship,” Chapter 13 buys you much more time, and more timing flexibility.
Chapter 13 Simply Buys More Time
Chapter 13 buys more time because a typical case lasts 3 to 5 years. The “automatic stay” prevents collection actions this entire length of time. A student loan creditor could try to persuade your bankruptcy judge to allow it to collect before the end of your case. But usually this doesn’t happen. So regardless of anything else, Chapter 13 puts off your student loan creditor(s) for a fairly long time.
Chapter 13 May Buy Time Until You DO Qualify for “Undue Hardship”
To discharge a student loan you (or your dependent) must be experiencing an “undue hardship” at that time. Chapter 13 gives you the flexibility of waiting for up to 5 years until you meet that condition. You file the case, and throughout its life your student loan creditor(s) is (are) prevented from collecting. Then, as soon as you do qualify for “undue hardship,” your bankruptcy lawyer would file the discharge petition.
For example, assume you or a financial dependent had a worsening chronic medical condition. But that condition was NOT YET preventing you from working, so that you were not yet in the circumstances that your student loan(s) was (were) preventing you from maintaining even a minimal standard of living. You could not petition for “undue hardship” discharge yet. But Chapter 13 would allow you to wait as long as 5 years after filing the case. This would give you time for your condition to worsen until you did met this requirement.
Chapter 13 prevents your student loan creditor(s) from chasing you for years. And it also allows you to delay asking to discharge your student loan debt(s) until the point when you’d qualify. In the right circumstances these could be huge advantages.
Chapter 7 “straight bankruptcy” stops student loan collection actions for a few months. Sometimes it can stop these actions permanently.
Bankruptcy gives you tools to deal with special debts—including those you can’t easily write off. Last week we got into income taxes. Today we discuss student loans, focusing on this special kind of debt in Chapter 7 “straight bankruptcy.” Next week, we’ll cover student loans under Chapter 13 “adjustment of debts.”
Let’s assume you owe a student loan that you can’t afford to pay. Here’s how Chapter 7 can help.
Student Loan Collection
Student loan creditors and collectors have extraordinary collection powers. Often they don’t need to sue you first and get a legal judgment against you, as most creditors must. These creditors and their collections have very aggressive collection procedures available to them. Besides the usual garnishment of bank accounts and paychecks, these special creditors can often grab your tax refund or a portion of a Social Security benefit check.
The “Automatic Stay” from a Chapter 7 Filing
Student loans are special in a number of ways. However, just like ordinary debts, student loan collections are immediately stopped by the “automatic stay” imposed by your bankruptcy filing. It doesn’t matter whether or not the student loan would be discharged (written off) in your Chapter 7 case.
The “automatic stay” stops “any act to collect, assess, or recover a claim against the debtor.” (Section 362(a)(6) of the U.S. Bankruptcy Code.) (A “claim” is a “right to payment”—essentially, a debt. See Section 101(5).) More specifically, the “automatic stay” stops “the commencement or continuation… of a[n].. . administrative… proceeding against the debtor. (Section 362(a)(1).) “Administrative proceedings” include the non-judicial collection actions mentioned above that don’t include a lawsuit. The Chapter 7 filing also specifically stops “the setoff of any debt” owed to you, such as a tax refund or Social Security setoff. (Section 362(a)(7).) So, filing bankruptcy stops all student loan collection actions.
This break from collections lasts throughout the 3-4 months that most consumer Chapter 7 cases take to finish. But unless you deal with the student loan appropriately in the meantime, after that its collection can continue.
Dischargeability of Student Loans
Bankruptcy permanently discharges some student loans. A dischargeable student loan must meet just one condition, albeit a tough and confusing condition. The student loan must cause you an “undue hardship.” As the Bankruptcy Code puts it, you can’t discharge a student loan unless that loan “would impose an undue hardship on the debtor and the debtor’s dependents.” (Section 523(a)(8).)
What does “undue hardship” mean? How much harder must it be than just a simple “hardship”?
You may feel like your student loans are causing you a great financial hardship. However, the federal courts have interpreted this phrase very narrowly. The details are beyond the scope of today’s blog post, but just keep in mind this condition is challenging to meet.
During the Chapter 7 Break in Collections
During the 3-4 months of your Chapter 7 case you want to take steps to make the temporary break in collections a permanent one. Here are three ways to accomplish this.
If you and your bankruptcy lawyer believe you meet the “undue hardship” condition, your bankruptcy lawyer would file an “adversary proceeding” during your Chapter 7 case. That’s a specialized lawsuit designed to determine whether you qualify for “undue hardship.” If you persuade the bankruptcy judge that you do, the student loan debt would be permanently discharged. Then the temporary break in collections would become permanent. There would be no more collection on a debt once you no longer legally owe it.
The bankruptcy judge may give you only a partialdischarge of your student loan(s). In this situation the judge is determining that repaying all of the loan(s) would cause you an “undue hardship.” But paying back only a portion would not. So you’d make arrangements to pay the remaining student loan debt, probably at a reduced monthly payment. As long as you made the payments your student loan creditor would take no further collection action against you.
If you don’t qualify for a full or partial “undue hardship” discharge, your Chapter 7 case would still at least discharge all or most of your other debts. That should leave you better able to pay the remaining student loans. Hopefully you’d be in a position to make payment arrangements. This may be done through a payment-reduction program which are available for various student loans. If so, then your situation would hopefully be resolved by the end of your Chapter 7 case. Then, at the time that the automatic stay would expire you won’t be facing any more student loan collections.
Avoiding Default and Preserving Options
Even if you don’t qualify for “undue hardship,” the bankruptcy pause in collections can be extremely helpful. It could maybe even be critical. That’s because you can only qualify for most student loan workout programs before you are too far behind on payments. So filing a Chapter 7 case before you’ve fallen too far behind could allow you to take advantage of these programs. But if you waited too long you could lose out, and be seriously disadvantaged.
It’s really crucial to talk with an experienced bankruptcy lawyer about all this. Student loans are complicated and often very challenging to deal with. This is true both outside and inside bankruptcy. You need a lawyer on your side who deeply understands both bankruptcy law and student loans.
Think about it: you have already made the mistakes; therefore, you know what to avoid. Bankruptcy tends to make filers better money managers both through experience, as well as through the required courses. Most new clients ask how long it will take to rebuild their credit, followed shortly by the firm statement that they will only ever pay for anything in cash ever again. Bankruptcy is one experience that will help you better manage your finances and empower you to to make better decisions in the future.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) due to their belief that the system was too lenient on those filing for bankruptcy. At that point, they instituted a two-part education program as a requirement to file for bankruptcy. These sessions include:
Pre-petition credit counseling which explores all financial relief options to determine if bankruptcy is, in fact, the best option; and
Post-petition financial management which occurs before the discharge is finalized and educates clients about how to move forward, budget, manage money, and rebuild credit successfully.
Beyond the Sessions
Most families attending these courses gain essential insights into bankruptcy alternatives, if they qualify, as well as best practices in money management to avoid a recurrence. A few of the most helpful pieces of advice include:
Get budget help through financial tracking apps;
Start an emergency savings fund instead of an emergency credit card;
Live within your means (appropriate house and car size);
Eat at home more often than you eat out (this includes coffee and sodas);
Cut cable and other unnecessary expenses;
Unsubscribe from tempting advertisement emails;
Teach kids to be thrifty in spending; and
Remember that less is more.
Ask Someone with Experience
Believe it or not, you will begin receiving offers from lenders offering you loans and credit lines shortly after finalizing your bankruptcy. Unfortunately, many people accept these offers for fear that there will be no other offers. Advice to consider is to avoid large loans in the beginning. If you work with small lines of credit and keep them paid on time, eventually better offers will come in. If you have questions about how bankruptcy can help your current situation and your future, a Boerne bankruptcy lawyer can help. At Law Offices of Chance M. McGhee, we provide cost-efficient and compassionate counsel to individuals, families, and small business owners struggling with a financial crisis. Call us today at 210-342-3400 to schedule a free case review.
Income tax debts can be handled in bankruptcy more than you think. This is true even with those taxes that are too new to be discharged.
The Automatic Staying, and the Discharge, of Income Tax Debts
Sometimes people are surprised to learn that filing bankruptcy gives you power over income taxes. It does so in two big ways. First, filing bankruptcy stops the IRS and state from collecting your tax debts—either temporarily or permanently. This is the “automatic stay” applicable to pretty much all of your creditors. Second, bankruptcy permanently writes off (“discharges”) some income tax debts—generally older taxes.
If all the income taxes you owe qualify for discharge, then your situation is quite straightforward. You file a Chapter 7 “straight bankruptcy” case, which stops any ongoing tax collection during the case. Then 3-4 months later, near the end of the Chapter 7 case, your tax debt is discharged. The “automatic stay” protection against tax collection ends. But you no longer need to worry about tax collection because you no long owe any taxes.
Or if instead you file a Chapter 13 “adjustment of debts” case (for reasons other than the tax debt), there’s a similar result. The dischargeable income taxes are treated just like your other “general unsecured” debts. They only get paid to the extent you can afford to do so, if at all, during your case. Often, during the 3-5-year Chapter 13 payment plan most or all of your available money goes elsewhere. It goes towards priority debts like child/spousal support or more recent taxes. Or it goes to catch up on a home mortgage or vehicle loan payments. Regardless how much, if any, you pay on the dischargeable taxes, at the end of your case the rest is discharged. So, as with Chapter 7, you then owe no more on those taxes so you don’t need to worry about any more tax collection.
The Expiring Automatic Stay and Nondischargeable Income Taxes
But what happens if some or all of your income tax debts do not qualify for discharge? The “automatic stay” does still go into effect as to those nondischargeable taxes. Your filing of a Chapter 7 case gives you a break from most collection actions of the IRS and/or state. If you are being garnished, that would stop. If the IRS/state was about to record a tax lien against your home, that would be prevented. If you are being pressured to enter into a monthly tax payment plan, that pressure would stop.
But this break from collection would not last long. The “automatic stay” expires in a Chapter 7 case at “the time a discharge is granted.” (See Section 362(c)(2)(C) of the U.S. Bankruptcy Code about the expiration of the “automatic stay.”) In just about all consumer Chapter 7 cases the bankruptcy court grants the discharge only 3-4 months after case filing. So you get a break but not much of one.
So what do you do if you have income taxes that would not be discharged in a Chapter 7 case?
The Chapter 7 Solution
If you filed a Chapter 7 case, it may discharge enough of your other debts that you could afford to enter into a monthly installment payment plan with the IRS/state for the remaining tax debts. The discharged debts may include some older, dischargeable income taxes, leaving you with less tax liability to still pay.
If discharging other debts leaves you in a position to pay your remaining tax debts over time, you (or your lawyer) should contact the tax authority immediately after the discharge to make payment arrangements. It may make sense to make contact even earlier so that the IRS/state knows your intentions. Ask your bankruptcy lawyer about the best timing.
You might also qualify for a reduction in the surviving tax debt amount. The IRS has a procedure for “offers in compromise” to settle a tax debt by paying less than the full balance. Most states have similar procedures. These are somewhat complicated to go through. You should not enter into such an attempt without getting solid legal advice about your chances of being successful.
The Chapter 13 Solution
Your financial situation after a Chapter 7 discharge may not allow you to pay off the remaining income tax debts through a tax payment plan. You may not have enough cash flow to pay it off fast enough to qualify. Furthermore, interest and tax penalties will continue to accrue, requiring you to pay substantially more over time.
You may also not be a good candidate for getting a reduction in the tax amount through a “compromise.”
So if instead you file a Chapter 13 case, the protection of the “automatic stay” remains in effect throughout the 3-to-5-year length of the case. This gives you up to 5 years to pay off the nondischargeable income taxes without any tax collections against you. This allows you to pay off those taxes under very flexible terms. You can often pay other even more urgent debts—like child support or home mortgage arrearages—ahead of the taxes.
Usually you don’t have to pay any additional interest and penalties. That alone could save you a significant amount, enabling you to pay off the tax faster and easier.
Also, the IRS/state can’t record a tax lien against you during the Chapter 13 case. That takes significant leverage away from the taxing authority. And if a tax lien had already been recorded against you, Chapter 13 usually can deal with it very favorably.
Overall, if a Chapter 7 would leave you too much at the mercy of the IRS/state, Chapter 13 is often a good alternative.
Ongoing child or spousal support is a very special type of debt in bankruptcy. So is support arrearage. Here’s how bankruptcy handles them.
Filing bankruptcy stops—or “stays”—the collection of most debts. (See Section 362(a) of the U.S. Bankruptcy Code about the “Automatic Stay.”) Then at the end of the bankruptcy case most debts are discharged—legally written off. (Sections 727 and 1328 of the Bankruptcy Code.) At that point the creditor is permanently forbidden to collect the debt.
However, filing bankruptcy doesn’t stop the collection of certain specific types of debts. And it only temporarily stops the collection of other types. These tend to be the types of debts that bankruptcy does not discharge.
Also, with some debts, whether collection is stopped depends on whether you file a Chapter 7 “straight bankruptcy” or instead a Chapter 13 “adjustment of debts” case.
The special debts for which collection does not stop or may stop only temporarily include:
ongoing monthly child and spousal support
child and spousal support arrearage
recent income taxes
debts incurred through fraud
Again, these tend to be debts that do not get discharged in bankruptcy. However, bankruptcy does provide tools for resolving such special debts permanently. Today we’ll show how this works with ongoing child/spousal support and support arrearage. We’ll cover the rest in the next couple of weeks.
Ongoing Child and Spousal Support
We need to distinguish between ongoing child and spousal support and support arrearage.
Ongoing support is what the divorce court requires you to pay on a regular basis, usually monthly. It is a type of obligation treated with more respect than likely any other consumer debt in bankruptcy.
Accordingly, filing bankruptcy does not stop the collection of ongoing support. If you are paying support voluntarily you need to continue paying it. If you are paying through a payroll deduction or a garnishment, it will continue.
This is true whether you file a Chapter 7 or a Chapter 13 case. Neither affects your continued obligation to pay ongoing support. The “automatic stay” does not apply. (Section 362(b)(2).) The discharge of debts does not apply. (Sections 523(a)(5), 1328(a)(2), and 101(14A).)
Child and Spousal Arrearage
As for support arrearage, neither Chapter 7 nor 13 can discharge this kind of debt either.
However, the automatic stay can stop collection of support arrearage, but only in a Chapter 13 case. Filing a Chapter 7 case will not stop support arrearage collection actions.
This ability to stop support arrearage collection through Chapter 13 can be extremely helpful. If you are behind on support payment, especially if you are significantly behind and its collection is financially hamstringing you, filing the more complicated Chapter 13 may well be worthwhile for this reason alone.
It’s extremely important to be aware that after filing your Chapter 13 case you can lose this automatic stay protection about collection of support arrearage. To prevent renewed collection, 1) you must keep current on your ongoing support, 2) your Chapter 13 plan must show how you will pay all the support arrearage during the case, and 3) you must consistently make your Chapter 13 plan payments so that you are in fact making continued progress towards paying off the support arrearage. If you don’t do any of these, your ex-spouse or support enforcement agency can quickly get the bankruptcy court to give permission to re-start collection of the support arrearage.
Many people mistakenly believe that if you are married and filing for bankruptcy, you must do so jointly. You have several options after determining that bankruptcy is the right choice. If you are unmarried, you will file independently. If you are married, you may file jointly or as an individual. Both spouses may also choose to file bankruptcy separately, at the same time. Strategically, one option may suit your situation better than the others, depending mainly on location, debts, and assets.
Texas and the Other Community Property States
Texas, along with nine other states, is a community property state. Meaning, any assets or property acquired during marriage belongs equally to both spouses, even if only one spouse’s name is on the contract. The assumption is that all decisions are made together, rather than individually, and both parties are contributing their fair share. Any items owned before the marriage are excluded from the community property, as are any items inherited or given only to one spouse after the union began; this is separate property.
More Property Is at Risk
If you choose to file bankruptcy without your spouse, more property is at risk in community property states than in common law states. In a common law state, only the separate property owned by the filing spouse becomes a part of the bankruptcy estate. In Texas, any community property not covered by exemptions is at risk for seizure. In some cases, filing for bankruptcy together doubles the amount of the exemptions, allowing spouses to keep more items.
The Affected Debts
In a community property state, there, fortunately, is no such thing as community debt. Each spouse has separate obligations for accounts solely in their name, as well as any held jointly. If one spouse files independently, their individual accounts, as well as their joint accounts, are dischargeable. The non-filing spouse experiences what is known as a “phantom discharge” or “community discharge.” Any community property co-owned by both parties becomes off-limits to discharged creditors, including wages. However, because the non-filing spouse did not file, their separate property is unprotected and at risk of seizure to satisfy the debt for joint accounts.
What Is Right for You?
Navigating the avenues of bankruptcy is often confusing and stressful for filers. Attorney Chance M. McGhee has over 20 years of experience assisting clients just like you begin their journey to a better financial future. If you have questions about how to file or wonder about the best option for your situation, a New Braunfels bankruptcy attorney is here to give you the answers you need. At the Law Offices of Chance M. McGhee, we are dedicated to helping you through the process. Call us today at 210-342-3400 for your free consultation.
Use Chapter 7 to stop paying an unaffordable income tax payment plan when the tax owed is dischargeable. Use Chapter 13 when it’s not.
Tax Agreement Payments Too High
We laid out the problem last week. You’d entered into a monthly payment plan with the IRS or your state because you couldn’t pay what you owed. But now you don’t have the money to make the payments. Or you’re in a payment plan but will owe more income taxes soon, putting you then in violation of your payment agreement.
If you violate your tax agreement the IRS/state could then take aggressive collection action against you. Or you might be able to add an upcoming new income tax owed into your current tax payment agreement. But the increased monthly payment may well push you over the financial edge. But even if you think you could afford it, you’d be going backwards instead of making progress.
Chapter 7 Makes Sense When Your Tax Owed Can Be Discharged
If all, or most, of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d discharge (forever write off) all or most of the taxes you owe. You’d either owe no taxes or owe a small enough amount to be able to handle it with a new smaller payment plan.
But if you can’t discharge all your income taxes, or enough, through Chapter 7, Chapter 13 “adjustment of debts” is likely the better tool.
Chapter 13 Plan
A Chapter 13 payment plan wraps all or most of your debts into a single monthly payment. This payment includes any tax debts. This single Chapter 13 monthly plan payment is based on your actual budget. Some debts—such as taxes, and secured debts such as a home mortgage and vehicle loan—get prioritized. Usually you pay less on your other debts, often not much, sometimes nothing.
Dealing with income tax debts with Chapter 13 gives you the following advantages over Chapter 7:
Income taxes that don’t qualify for discharge do need to be paid in full, but on a very flexible schedule. You and your bankruptcy lawyer create a new plan incorporating all of your debts. This plan focuses your resources on your most important debts, including nondischargeable income taxes.
Usually you don’t pay ongoing interest and penalties. This saves you potentially lots of money. That’s particularly true if tax interest rates will rise in the near future along with other interest rates.
Other even more important debts—such as child/spousal support, or unpaid mortgage or home mortgage payments—can often be paid ahead of income tax debts.
The budget you enter into earmarks enough money to withhold from your paycheck or pay quarterly for the current year’s taxes. This enables you to break out of the endless cycle of being behind on your income taxes.
Chapter 13 handles income tax liens much better than Chapter 7. If there’s no equity supporting the lien, you can often get rid of the lien without paying anything for it. If the lien is partially secured, you will likely pay less to get rid of it than otherwise. Chapter 13 takes away much of the leverage of tax liens from the tax authorities.
You are protected throughout your entire 3-5-year Chapter 13 payment plan from tax collection. Bankruptcy stops all tax collection, including the recording of tax liens. In Chapter 7 this protection lasts only 3-4 months. Then you’re on your own dealing with any remaining tax debts. With Chapter 13 the protection lasts until the end of your Chapter 13 case. At that point you should owe absolutely no tax debt.
Filing bankruptcy allows you to unilaterally break your monthly payment agreement with the IRS and/or state. With Chapter 7 you may be able to discharge all or most of your tax debts. Or, discharging all or most of your other debts may make it possible to stay in your tax payment plan, if that’s your only significant debt. However, if Chapter 7 doesn’t help you enough, Chapter 13 gives you many other significant advantages (some listed above). Talk with an experienced local bankruptcy lawyer to figure out which is better for you.
Can’t afford your current IRS/state monthly payment plan? Have an upcoming additional new year of taxes to pay? Chapter 7 can often help.
Tax Installment Agreement You Can’t Afford
It’s a common problem. You owed income taxes a year or two ago when you sent in your tax returns. Money was very tight so you couldn’t just pay it off. You found out that the IRS let you pay that unpaid tax through a monthly installment plan. If you also owed state income taxes, you likely found out that your state taxing authority lets you do this, too.
So you set up the payment plan with the IRS and/or state. But your financial situation only got tighter because now you had a new monthly obligation you absolutely had to pay. So now you are struggling to pay the monthly tax payment along with your living expenses and other debts. You wish there was a way to get out of your IRS/state monthly tax payment and other debts.
Tax Installment Agreement You Are About to Break
If you were desperate to have the money to pay the monthly tax payment (along with your other obligations), you may have arranged to withhold less from your paycheck during the current year. Or if you’re self-employed you may not have paid enough estimated quarterly taxes.
If so, you’ll likely owe income taxes again when your next tax returns are due. Assuming you couldn’t then immediately pay this new tax owed, this would likely be considered a breach of your current payment plan with the IRS/state.
At that point the IRS/state could terminate the monthly payment agreement. It could then take aggressive collection action against you, something you really want to avoid.
Or instead the IRS/state might let you roll the new tax owed into your current installment agreement. But that would likely result in an increased monthly payment. This only aggravates your problem of having more debt than you can handle.
Even if you could afford to pay an increased monthly tax installment payment, you’d be going backwards instead of making progress. The tax interest and penalties would add significantly to the amount you have to pay. You’re in vicious cycle and don’t see a way out of it.
Two Ways Out
But there ARE potentially two ways out: Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” We’ll cover Chapter 7 today; Chapter 13 next week.
Chapter 7 Discharge of Tax Debts
Which Chapter is better depends on many factors, but especially on whether your older income tax debts are “dischargeable.” This means whether the taxes can be legally, permanently written off in bankruptcy.
Some income taxes CAN be discharged. Basically, certain amounts of time must pass since the time the tax return for the tax was legally required to be submitted, and since the tax return was actually submitted. If you meet those conditions (and some other possibly relevant ones), the tax debt is dischargeable just like any ordinary debt.
When Chapter 7 Makes Sense
If ALL the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d not have to pay anything anymore on that monthly payment plan. If you anticipate owing new taxes with your next tax return(s), you could likely enter into a fresh monthly payment plan for these taxes. You wouldn’t end up breaching your present payment plan because you would no longer owe anything on it.
If SOME of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 may also make sense. You would no longer have to pay that part of your taxes, which would presumably reduce your monthly tax payments. If that reduced amount is one that you could afford—especially after discharging all or most of your other debts—Chapter 7 would help enough to justify using this tool.
If Chapter 7 Isn’t Good Enough
If you can’t discharge all your income taxes, or enough, through Chapter 7, consider Chapter 13 “adjustment of debts.” We’ll explain in our blog post next week.