“T” Is For Tax Discharge In Bankruptcy.

Contrary to popular opinion amongst most of the people that come into my office, income taxes can be discharged in bankruptcy. It’s true. Whether the money is owed to the Internal Revenue Service or the Michigan Department of Treasury, income taxes can be discharged in a Chapter 7 and Chapter 13 bankruptcy. If you meet all  the following  conditions,  you can discharge your back taxes in full.

3 Years Old:   The tax debt has to be at least three years old. More than three years have to pass between the date of filing and the date the tax return was due. Typically, the due date is April 15th of each year. However, if you filed for an extension for the tax year in question, the three years won’t start running until the due date of the extension. The date you actually filed the tax return doesn’t matter when calculating the three years. The due date controls, not the filing date.

2 Year Filing Requirement: The tax return must have been filed within the last two years. If you failed to file the return, even if the tax debt is more than three years old, you cannot discharge it. If the IRS files a tax return for the taxpayer, that doesn’t count. The tax filer must file the return themselves.

Assessed in the last 240 days: The taxes must have been assessed or determined by the IRS more than 240 days before the bankruptcy filing. For example, if your 2007 tax return is audited in 2010, you must wait until 240 days have passed from the latest date that the tax was finally determined. Tax assessments after the date of bankruptcy filing cannot be discharged as they are post-filing debts. Keep in mind that taxes based on fraudulent tax returns, trust fund taxes, or sales taxes are never dischargeable.

Not a tax lien. Once a tax debt becomes a lien on any of your real or personal property, it is a secured debt and cannot be discharged. The IRS will file the notice in either the county the land is or where the debtor lives depending on what property is being attached

Timing is everything. A mistimed filing that does not take into account all of these conditions will fail to discharge your tax debt. Sometimes, if possible given your circumstances, you may want to delay filing if it will insure wiping out old tax debt. Your bankruptcy lawyer should be familiar with these rules and help you maximize your debt relief.

“T” also stands for:

Chris McAvoy is a Taylor, Michigan attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info. We help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, and the Downriver, Michigan area.

photo by: *Sally M*

“I” Is For Income Tax Refunds

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Federal and State income tax refunds and credits are treated like a savings account for most people. Income tax refunds are used to catch up on bills, make repairs, or buy some necessary household items. Clients want to keep their income tax refunds, creditors want to garnish them, and Trustees like to seize them. Read on for the essential guide on how you can file for bankruptcy and keep your income tax refunds in Michigan.

Chapter 7 and income tax refunds.

Income tax refunds and credits are considered an asset in a Chapter 7 bankruptcy and must be listed on Schedule B as property even if you aren’t sure what they will be. If you forget to list and exempt them, you may very well lose them to the Trustee. It doesn’t matter what month you file, you need to schedule them pro rata. For example, it is June of 2012 and you file bankruptcy.  You have to list your anticipated refunds for 2012. In 2011 you received $3,000 in Federal and State tax refunds and credits. Using that as a your guide, list half of the prior year’s refunds. Remember, this is June in our example and half the year is up. After the anticipated refund is scheduled, exempt them using your Federal d5 wildcard exemption and you are all set. Most pro se clients and a lot of rookie lawyers make this mistake to their detriment.

Chapter 13 and income tax refunds.

Here in the Eastern District of Michigan tax refunds are not handled the same in Chapter 13s are they are in 7s. If you don’t live here, your local custom may treat them differently. Anticipated Federal tax refunds are considered disposable income and are turned over to the Trustee for distribution to your creditors for as long as you are in bankruptcy. State of Michigan refunds and credits are yours to keep. If you are in your Chapter 13 you may be able to keep your refund if you can show a need, for example, you need the money to make a necessary car repair, buy a new stove, or make a home repair. You will need court permission to do this. Do not spend the money without court permission. Here is a quick tip: If you are expecting a tax refund, try to hold off on filing your Chapter 13 until after you have filed your returns and received your refunds. You will have to turn them over in the future, but you can get them one last time. After your Chapter 13 is completed, you can stop turning them over to the Trustee.

Garnishment of income tax refunds.

Filing for bankruptcy protects you from creditor garnishments. But what if you haven’t filed yet and you are worried judgment creditors will try to garnish your refunds. Federal refunds cannot be garnished from the IRS. They can only be garnished from your bank account after you have received them. State of Michigan refunds and credits can be garnished by a judgment creditors. Usually in the Fall of each year, creditors file garnishments. If you would like to keep you state tax refunds and are going to file for bankruptcy here is a really simple solution to keep them from being garnished: File your State tax returns after you file for bankruptcy. It’s just that simple. You don’t have to file your tax returns by April 15th of each year if you are owed money. You have up to three years to file and get your past refunds without penalty. The filing deadline is for people that owe taxes.

“I” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people in the  Downriver area  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.

Creative Commons License photo credit: bixentro

Debt Forgiveness, Taxes, and the 1099c

Analyzing Financial DataBankruptcy can avoid taxes on debt forgiveness and avoid the impact of a 1099c. Let’s say you are working with a debt negotiator or a collection agency and work out a favorable deal. You negotiate a debt from $25,000 down to $2,500 (which I just did for a client recently.) Sounds great. Well, it can be but only if you know the rest of the deal. The 1099c is the part that the debt negotiator doesn’t tell you about or puts in the “fine print.”

The amount forgiven is considered taxable income by the IRS and the creditor is obligated to report it to the IRS if the amount forgiven is more than $600.  The creditor will issue a 1099c. In my guy’s case, he will get a 1099c for $22,500 and have to pay taxes on it which is fine as long as you know that going in and take it into consideration. Here is the IRS publication with some details.

You won’t always have to pay taxes on the amount forgiven. The exceptions:

  • the debt was a non-business debt and was canceled before 2007 as a result of Hurricane Katrina
  • a student loan was canceled because you worked in a profession and for an employer as promised when you took out the loan
  • the canceled debt would have been deductible if you had paid it
  • the cancellation or write off of the debt is intended as a gift (this would be unusual)
  • you discharge the debt in a bankruptcy proceeding
  • you were insolvent before the creditor agreed to settle or write off the debt

If you cannot afford to pay the taxes on it you better not agree to it because you do not want to owe Uncle Sam.

These rules also apply to deficiencies after a foreclosure or short sale. It sounds pretty unfair to get a 1099 after you lose your house.  Under the Mortgage Forgiveness Debt Relief Act of 2007  certain loans will be partially or wholly forgiven from 2007 through 2012. If the real estate is your primary home and the loan was for the purchase or improvement, then there is no tax consequence. If the loan was for investment property or used for something else, e.g., you took out a second mortgage for a credit card consolidation payment, you are going to pay taxes on it.

Bankruptcy may be a good alternative to negotiation. There are no tax consequences to discharging your debt or surrendering a house in a bankruptcy. None. In a Chapter 7, you can discharge all your debt, pay your creditors nothing, and not have any tax consequences. If you negotiated a debt, you may want to file for bankruptcy before the 1099c comes, especially if didn’t know about it and aren’t ready.

Keep in mind, I am just a bankruptcy lawyer and not an accountant. If your accountant knows more than I do, take his word for it. I am just bringing this issue to your attention because it takes a lot of my clients by surprise.

To learn more about bankruptcy and what I can do for you, please take some time to read The Bankruptcy Book.

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Creative Commons License photo credit: Dave Dugdale

How to File a Chapter 7 Without a Lawyer.

I understand why people search for help on how to file a Chapter 7 bankruptcy without a lawyer.  Money is tight. You don’t think you can afford to hire a lawyer.  While a person has an absolute right to represent themselves in court including bankruptcy proceedings it doesn’t mean you should do it.  A person also has an absolute right to give themselves a root canal or remove their appendix, neither of which is a good idea.

There is a lot of financial information that needs to go into a Petition including any interest in real estate, personal property of any type or kind, all of your creditors, your financial history for the past couple of years and then there is the Means Test. Figuring out how to do this has confused bankruptcy judges across the country since 2005. [Read more…]

Bankruptcy and Tax Refunds: 5 Things to Know

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Tax refunds can be thousands of dollars which most people count on getting each year and if you want to keep your refund from the bankruptcy Trustee you must read this post.  My clients use this money to catch up bills or unpaid utilities; get caught on up the mortgage or rent; maybe a down payment on a car; or even home repairs or clothes for the kids. If you want to keep your tax refunds from, here are some things you need to know.

1. Federal tax refunds cannot be garnished from the IRS. They can be garnished from your bank account once you receive them. If you want to keep your federal tax refunds [Read more…]

Tax Refunds and the Chapter 13 Bankruptcy in Michigan.

In my prior post, I discussed how tax refunds are an asset under Chapter 7 bankruptcy laws and have to be protected by exemptions for the debtor to keep them. The treatment of tax refunds in Chapter 13 cases is a lot different not only in Michigan but in a lot of other districts as well. State refunds are easy so we will get those out of the way. The debtor gets to keep the Michigan refund but has to turnover the Federal refund.

To avoid relying on the debtor to turn the refund over, the model plan had language in it which ordered the IRS to turn the refund directly over to the Trustee. The IRS got annoyed about this and sued to stop this order and won. See United States of America vs. Krispen S. Carroll. This doesn’t mean [Read more…]