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Recent Blog Posts
Bankruptcy Timing: Include Income Taxes Owed for 2015 by Filing Chapter 13 in Early 2016
As of January 1, 2016 you can include any taxes you owe for the 2015 tax year in your Chapter 13 payment plan.
If you’ve been thinking about filing bankruptcy, and expect to owe income taxes for 2015, you have an extra reason to file a Chapter 13 “adjustment of debts” now that we’re in the new year. That’s because now that 2016 has begun you can include income taxes owed for the 2015 tax year in your new Chapter 13 case and payment plan. Being able to include taxes owed for 2015 gives you significant advantages.
It saves you money, gives you crucial flexibility, and stops future tax liens and other tax collections.
Saves You Money
Including what you owe in income taxes for 2015 in a Chapter 13 payment plan saves you money because almost always you don’t have to pay any additional interest and penalties on the tax owed. The savings can be huge.
That’s particularly true if you have other debts that you want or need to be paid ahead of the 2015 tax. That would delay payment of the taxes owed for 2015. As a result the savings from not paying any accruing interest and penalties would be that much greater.
Bankruptcy Timing: Filing in 2016 to Write Off More Income Taxes with Chapter 13
With Chapter 13 you may have to pay some part of the taxes that you could just discharge under Chapter 7, but it may be worth it.
Last week just before New Year’s Day we showed how to discharge (legally write off) more of your tax debts (likely for the 2012 tax year) under a Chapter 7 “straight bankruptcy.” Today we show how that’s done under the Chapter 13 “adjustment of debts” form of consumer bankruptcy.
Dealing with Income Tax under Chapter 13
The most direct way bankruptcy deals with older income taxes is by quickly discharging them in a Chapter 7 case. As long as the tax meets the conditions for discharge, under Chapter 7 you would simply not legally owe the tax at all usually within about 4 months after filing the bankruptcy case.
But there are many circumstances in which a Chapter 13 case would be better for you than Chapter 7. Some of these circumstances involve income taxes and some so not.
The New Year, a Fresh Start!
You know bankruptcy gives you an overall fresh financial start. But it can provide special fresh starts you may not know about.
The Overall Financial Fresh Start
You get a new financial life by legally writing off (“discharging”) debts so that you are out from under them and never have to pay them again. With consumer and small business debts you have two main choices about how this happens.
The Chapter 7 Fresh Start
With a Chapter 7 “straight bankruptcy” the discharge of debts happens very fast. The moment your case is filed the creditors can’t take any more action to collect their debts against you, your money, or your property. Then usually about 100 days later the bankruptcy court enters an order discharging your debts. You are debt-free, other than possibly debts you want to keep such as a vehicle loan, and certain debts you can’t discharge like recent income taxes or back child support.
Bankruptcy Timing and the Holidays: Filing in December May Shorten Chapter 13 Case by 2 Years
We show how filing bankruptcy before the end of December could result in a much shorter Chapter 13 “adjustment of debts.”
Two weeks ago we showed how filing bankruptcy by December 31 could enable certain people to file a Chapter 7 case instead of being forced into a Chapter 13 one. They could have their debts discharged (legally written off) within 3 or 4 months under Chapter 7. Otherwise under Chapter 13 they would be required to go through a 3-to-5-year payment plan. And they would only get a discharge of their remaining debts if they’d successfully make it to the end of that payment plan.
If You Need a Chapter 13 Case
But getting to file a Chapter 7 case wouldn’t be any motivation to file your bankruptcy this month if you already knew that you needed a Chapter 13 case anyway. Although Chapter 13 takes so much longer, and is riskier, it can accomplish many things that Chapter 7 simply can’t. Chapter 13 can give you incredible help if you are behind on your mortgage and want to keep your home. It can buy you time and protection and save you a lot of money if you owe tons of income taxes and especially if they span more than one tax year. Chapter 13 can enable you to catch up on child or spousal support better than anything. These are just some of the many ways that Chapter 13 is a great tool for dealing with your creditors.
Bankruptcy Timing and the Holidays: Gift-Giving and "Fraudulent Transfers"
Gift-giving, or selling for much less than actual value, can cause problems ahead of bankruptcy, but only if it’s a large gift.
“Fraudulent Transfers” Usually Not an Issue
This blog post is about a topic to be aware of but one that’s seldom an issue for consumers or small business owners filing bankruptcy. However, in part because “fraudulent transfers” often involve some version of gift-giving, it’s particularly worth getting an understanding of this during the holiday season.
We’ll briefly explain here what a “fraudulent transfer” is, its two different forms, why neither are a problem for most people, and when you should be concerned.
What’s a “Fraudulent Transfer”?
Basically, it’s a debtor’s giving away (transferring) an asset to avoiding paying creditors the value of that asset.
This legal concept was first addressed more than 400 years ago in English law, which we adopted, so this is an issue that’s been around for a long time.
Bankruptcy Timing and the Holidays: "Preferenceâ Payments
You may have extra motivation and greater ability to repay a personally important debt this time of year. But maybe you shouldn’t.
Careful about Paying a Favored Creditor
Around the holidays you may be extra motivated to pay back a personal loan. The relative or friend may be in real need of the money and pressuring you to pay it. Or if you are considering bankruptcy you may not want it to involve this person, or to have him or her know about it.
You might feel be better able to pay this debt. You may have gotten an annual bonus from work, or more income from working extra hours or a side job during the holidays. You might have even stopped paying other creditors so you have more money to pay who you want.
But when you know the possible consequences you might not want to pay that special debt after all. At least not yet.
The Rare, Dangerous, but Avoidable “Preference”
Bankruptcy Timing and the Holidays: The "Cash Advances" Presumption of Fraud
If you can, don’t do cash advances during the holidays if you’re contemplating filing bankruptcy. If you do, understand the rules about them.
In our last blog post we explained the “luxury” presumption of fraud. This provision in bankruptcy law increases the risk that you would not be able to “discharge” (legally write off) a very particular kind of debt. That kind of debt would be one that resulted from a purchase or a set of purchases totaling more than $650 made during the 90 days before filing bankruptcy.
The “cash advances” presumption of fraud is closely related to the “luxury” one. The dollar amounts and timeframe are just a little different. This “cash advances” presumption increases the risk that you would have to pay a debt tied to a cash advance or set of cash advances totaling more than $925 made during the 70 days before filing bankruptcy. (Notice that for this presumption to kick in, you incur somewhat more credit in a somewhat shorter period of time than with the “luxury” presumption of fraud.)
Bankruptcy Timing and the Holidays: The "Luxury" Presumption of Fraud
If you’re considering filing bankruptcy, try to avoid using credit cards to finance the holidays. But if you do, there are some extra risks.
Using Credit Shortly Before Filing Bankruptcy
Using credit during the holidays if you’re contemplating bankruptcy is dangerous. It could be considered fraud if you run up debt that you don’t intend to honor.
What is "Fraud" in Bankruptcy?
The bankruptcy system rewards honesty. One of the core principles in bankruptcy is that debts which are entered into honestly can later be written off, while debts entered into through cheating cannot.
When you incur a debt, you are agreeing to pay the debt. If at the time you are incurring a debt you actually don’t intend to pay it, that would be cheating. Falsely saying or implying that you intend to pay the debt would be a misrepresentation and likely a fraud. There is a risk that such a debt would not be written off ("discharged") in bankruptcy.
Chapter 7 and Chapter 13--Unsecured Debts
Which of the two consumer bankruptcy options is better for you if you have lots of unsecured debts depends on the kind of unsecured debts.
Unsecured Debts
Debts that are unsecured are those which are not secured by anything you own. The creditor has no “security interest” in anything, no right to repossess anything if you don’t pay the debt.
In general it’s easier to deal with unsecured debt than secured ones in bankruptcy.
Unsecured Debts Turning into Secured Ones
Unsecured debts can turn into secured ones if you don’t pay them. A credit card holder or medical provider can sue you for the balance owed, get a judgment against you, and usually can record that judgment as a lien against your home and other possessions. If you don’t pay your federal income taxes the IRS can record a tax lien against your real estate and personal property without suing you.
Chapter 7 and Chapter 13--Delayed Sale of Your Home
In a Chapter 13 case you can schedule to sell your home as part of the court-approved plan, or leave it more flexible.
In our last blog post we described briefly how Chapter 13 can often give you tremendous flexibility about the timing of the sale of your home. Here we expand on your options.
A Scheduled Home Sale
If you definitely plan on selling your home and you know when you want to do so, you can build your Chapter 13 plan around that sale. Depending on your situation, you may be able to schedule selling your home anytime during the following 5 years, the maximum length of a Chapter 13 payment plan.
The main benefit of incorporating your intended sale into your formal plan is that doing so allows you to pay certain creditors out of the expected proceeds of the sale. That usually allows you to pay less to creditors during the rest of your case.
For example, if at the time you file your case you are $10,000 behind on the first mortgage and filed the Chapter 13 case to prevent a foreclosure, you would normally have to catch up on all of that $10,000 through monthly payments during the 3-to-5-year case. But if you schedule the intended home sale for, say, two and a half years after the case is filed, you would often be able to pay all or most of that $10,000 out of the proceeds of the sale. This assumes that there is good indication that you will have sufficient equity in the home at the time of the sale to pay that $10,000 or so then.
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