Thursday, November 21, 2013

Taxes and Bankruptcy, Can They Be Discharged?

To be dischargeable, individual income tax liabilities must meet the following “mechanical” rules of 11 USC §523:

(a) A discharge under section 72711411228 (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;

What this means is that in order for a tax to be eligible for discharge, it must be over three years old.  This date is usually determined by when the tax became due.  For example, 2009 Federal Income Taxes did not become due until 2010, therefore they would not be over three years old until 2013.  Additionally, the tax return not only needs to have been filed with the government, but filed at least 2 years before the bankruptcy was filed.  For example, if a 2006 tax return was filed in 2009, and then a Bankruptcy was filed in 2010, the tax would not be eligible for discharge, but if the bankruptcy were filed in 2012, it would be beyond the 2 years and the tax would be eligible for discharge.  The third part of the test is that the tax must have been assessed more than 240 days prior to the bankruptcy filing.  This means that if a 2006 return, filed in 2006, is audited in 2013, a bankruptcy filing would have to come more than 240 days after the new assessment as a result of the audit.

If that wasn't enough, filing fraudulent returns or willful attempts to evade or defeat a tax can also prevent such taxes from being discharged (11 USC § 523(a)(1)(C)). Some other types of taxes, including, but not limited to, withheld payroll taxes, the trust fund penalty under IRC § 6672, most state sales taxes and certain excise taxes, are never dischargeable. Such nondischargeable taxes may also be priority debts under 11 USC § 507(a)(8).

If you are burdened by tax debt and want to know if a bankruptcy could help, contact a local bankruptcy attorney.  This is just a brief overview of some of the potential issues that tax debt can cause.  Many bankruptcy attorneys offer free consultations, and they will be better situated to look at your precise situation and let you know whether your taxes can be discharged in bankruptcy. 

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What is a Discharge?

One of the core reasons an individual files bankruptcy is to receive a “discharge.”  While this is an important aspect of bankruptcy, it is not the only purpose of bankruptcy.  There are numerous examples of why an individual would file a bankruptcy, even if they were not eligible for a discharge.  A discharge is a Court order that states an individual does not have to pay all, or some of their debts.  Some debts cannot be discharged.  

A discharge only applies to debts that arose prior to the bankruptcy filing.  For example, if Sally filed Chapter 7 Bankruptcy on August 27, 2013, and then purchases a car on November 3, 2013, the debt from the car would not be subject to the discharge order. 

Once a Debt has been discharged, no one can make the individual pay that debt, but the individual can pay the debt voluntarily.  An example of this is if Sally has a credit card and files bankruptcy, absent a court order stating otherwise, when the Discharge Order is issued the credit card company will not be able to come after Sally for the debt.  They won’t be able to sue her, they won’t be able to garnish her, and they won’t be able to call her and ask for payment. 

Secured debts, such as car notes, can be discharged, meaning that the creditor cannot make the individual pay the debt, but that does not mean that the creditor cannot take the collateral for the debt.  This means that in the example above, if Sally had purchased the car on July 12, 2013 instead of November 3, 2013, she could discharge the debt, but the creditor can also come take the car from her.  So if Sally does not make car payments, she will not be able to keep the car.  Additionally, if Sally reaffirmed the debt in her bankruptcy, then she would still owe the money even after the discharge.

Some debts cannot be discharged.  These are covered more in depth in other articles, but a quick example of this is if Sally owes child support.  Child Support is not eligible to be discharged, so even after the discharge order in her bankruptcy; Sally will still owe child support. 


If you have questions about a discharge, or are contemplating bankruptcy and want to know if your debts can be discharged, contact a local bankruptcy attorney.

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Friday, November 15, 2013

Bankruptcy and Credit Scores – How Much Will it Drop?

One of the biggest fears I have seen from people considering bankruptcy is the impact it will have on their credit score.  Credit plays such an important part of our lives in this day and age, that people fear they will never get credit again if they file bankruptcy.  People are afraid they will never be able to do things in the future such as purchase a car or home if they file a bankruptcy.  Out of this fear, people will struggle for months, and even years, in an attempt to save even a mediocre credit rating and ultimately end up filing a bankruptcy anyway.  To say that bankruptcy would not affect your credit rating would be false.  It absolutely will.  To say that bankruptcy will bar an individual from ever purchasing a home would also be false though.  There are countless numbers of people who have filed bankruptcy that own homes.

What impact will bankruptcy have my credit score?

This question is often raised when I meet with people about the possibility of bankruptcy, and the answer is, I cannot tell you.  It is impossible to predict how much a bankruptcy filing will drop a credit score as there are numerous factors to every credit score.  The impact is largely going to be based on where the credit score is now, and what information is on the credit report.  An individual with a credit rating of 780 who files a Chapter 7 bankruptcy may see a larger drop in points than an individual with a 680 credit score, but realistically, the credit scores are likely to drop to a similar number.  Therefore, an individual with a credit score in the 500’s, is going to see less of a “hit” on their credit score than an individual with a credit score in the 700’s.  These are just examples and estimates though, depending on what is on your credit, the only way to truly know how much the filing of a bankruptcy will affect your credit score is to file.

Are there alternatives to filing bankruptcy?

While bankruptcy will have an impact on your credit score, the alternatives may not be an option depending on your situation.  Some options include: 1) paying the debt on your own; 2) Entering a debt management plan through a credit counseling agency; 3) Debt Consolidation; and 4) Settling your debts.  While these are all alternatives to filing bankruptcy, they are not the right choice for everyone.  For example, if an individual doesn’t have the income in order to pay the debts, then paying the debts would not be an option.  Out of all of these options, filing bankruptcy will likely have the largest immediate impact on the credit rating, but it might also be the best option.  If your resources are limited, then paying back your debt is not likely an option.  Depending on your income, expenses, and the status of your accounts, many of these may not even be an option.

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Can Your Credit be rebuilt after Filing Bankruptcy?

The answer is simple, absolutely.  If you decide that bankruptcy is the right choice based on your situation, your credit score is not lost forever.  Credit Ratings are fluid.  They can go up, they can go down.  Even after a dramatic change, such as filing a bankruptcy, they can go up again.  Realistically, if you are considering bankruptcy, there is a good chance that your credit is already in distress.  Once you are out of bankruptcy, and back on your feet, you can begin the process of rebuilding your credit.  This can be done by establishing a positive payment history with new creditors, all while not burdened by the previous debts.  Many people are extremely surprised with how quickly they begin receiving credit card offers after the completion of their bankruptcy, even though it still says on the credit report that they filed bankruptcy, and will do so for up to 10 years.  As time passes from the date of filing, the impact of the filing diminishes. 


If you are considering bankruptcy, and want to know more about how it will affect your credit rating, and how the process works, contact a local bankruptcy attorney.  Many offer free consultations, and they will be better suited to address your current situation and advise you on whether or not bankruptcy is the best choice for you.  If bankruptcy id the best choice, they will be able to help you through the process, so that you can conclude it with as little stress as possible and begin the road to recovery with your credit rating.  

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Median Incomes for Bankruptcy as of November 15, 2013



 
FAMILY SIZE
STATE
1 EARNER
2 PEOPLE
3 PEOPLE
4 PEOPLE *





ALABAMA
$39,768
$48,770
$51,621
$66,434
ALASKA
$53,489
$76,118
$82,377
$85,581
ARIZONA
$41,993
$55,022
$56,503
$64,604
ARKANSAS
$37,081
$46,495
$50,755
$58,333
CALIFORNIA
$47,798
$62,009
$66,618
$75,111
COLORADO
$50,242
$65,701
$71,138
$83,330
CONNECTICUT
$60,403
$72,761
$86,254
$104,670
DELAWARE
$51,711
$62,350
$68,439
$85,806
DISTRICT OF COLUMBIA
$45,793
$89,233
$89,233
$101,582
FLORIDA
$41,334
$51,839
$53,952
$63,196
GEORGIA
$40,631
$52,610
$55,829
$68,085
HAWAII
$52,975
$65,708
$80,618
$83,538
IDAHO
$40,303
$51,105
$52,366
$59,971
$47,536
$61,253
$70,014
$81,680
INDIANA
$41,250
$51,926
$61,021
$71,113
IOWA
$42,346
$58,057
$64,027
$76,173
KANSAS
$43,793
$57,502
$65,394
$72,453
KENTUCKY
$40,633
$47,788
$53,639
$67,839
LOUISIANA
$38,639
$49,078
$53,768
$68,890
MAINE
$40,560
$53,979
$61,702
$72,841
MARYLAND
$58,202
$75,992
$86,655
$105,685
MASSACHUSETTS
$55,794
$69,569
$84,269
$105,299
MICHIGAN
$44,072
$52,540
$61,110
$74,863
MINNESOTA
$48,876
$64,454
$77,579
$90,945
MISSISSIPPI
$35,306
$44,149
$44,149
$51,140
$40,994
$51,421
$57,468
$72,230
MONTANA
$40,419
$55,715
$60,107
$69,954
NEBRASKA
$41,866
$59,564
$61,380
$73,402
NEVADA
$41,054
$55,349
$55,349
$61,732
NEW HAMPSHIRE
$52,588
$67,408
$82,656
$97,499
NEW JERSEY
$60,317
$70,150
$85,575
$103,946
NEW MEXICO
$38,914
$49,538
$50,548
$55,184
NEW YORK
$47,414
$59,631
$70,151
$83,614
NORTH CAROLINA
$40,736
$51,662
$55,049
$66,147
NORTH DAKOTA
$44,098
$61,172
$72,041
$87,154
OHIO
$43,057
$53,075
$60,679
$76,381
OKLAHOMA
$39,749
$51,097
$55,641
$64,916
OREGON
$44,779
$55,568
$60,693
$70,812
PENNSYLVANIA
$47,119
$55,872
$70,092
$81,961
RHODE ISLAND
$48,651
$61,510
$74,720
$91,592
SOUTH CAROLINA
$39,301
$48,891
$54,010
$62,490
SOUTH DAKOTA
$39,040
$56,899
$60,259
$75,267
TENNESSEE
$39,759
$48,053
$56,042
$62,805
TEXAS
$41,354
$56,296
$59,567
$68,566
UTAH
$49,347
$57,734
$65,311
$70,176
VERMONT
$43,772
$60,346
$67,388
$79,128
VIRGINIA
$51,817
$65,510
$75,774
$90,945
WASHINGTON
$52,996
$63,409
$72,286
$84,970
WEST VIRGINIA
$42,415
$45,284
$54,229
$65,442
WISCONSIN
$43,958
$57,903
$67,808
$80,198
WYOMING
$51,116
$65,237
$70,319
$76,120

Add $8,100 for each individual in excess of 4.