Monthly Archives: May 2014

Can bankruptcy discharge back taxes, such as personal income taxes?

Yes, sometimes.

Normally, your chapter 7 case doesn’t affect priority debts (“government type” debts, like taxes, child support/alimony, student loans, and criminal restitution).  However, some taxes can be discharged by bankruptcy.

To discharge taxes in a chapter 7 bankruptcy, your back taxes must follow these five rules:

1.  they are income taxes (not business taxes, unemployment taxes, etc.),

2.  the taxes are at least 3 years old,

3.  you filed the returns more than 2 years ago,

4.  the taxes were assessed more than 240 days ago,

5.  there was no willful fraud or evasion.

You can file a chapter 7 bankruptcy and then file a separate adversary proceeding to determine if they are discharged, but most people simply file the chapter 7 and list the taxes in their bankruptcy.  If the personal income taxes meet those five rules, they are discharged.

The most frustrating thing is that you won’t get a written letter from the IRS or State Tax Commission saying, “Your taxes are now discharged.  Have a great day!”  Instead, you will simply have to watch for your next collection notice from them to see how much of your penalties and interest survived the bankruptcy because they were assessed during that 240 day window before you bk was filed.

And please remember that the bankruptcy does not discharge any tax liens filed against your property.  Those liens are still valid.

Can bankruptcy strip/discharge/remove/get rid of a tax lien filed against me?

Nope.

There are certain situations in bankruptcy where you can discharge old personal income tax debt liability.  That is discussed elsewhere in the blog.

However, if the taxing authority (for example:  the IRS or State Tax Commission) has also filed a tax lien against your property, then the bankruptcy will NOT get rid of that tax lien.  If you don’t know what a tax lien is, then you probably haven’t dealt with income tax issues in the past.  A tax lien occurs when you owe back taxes.  The tax lien gives notice to your creditors, potential home buyers, potential lenders, and everyone else, that you owe back taxes and penalties.  The lien secures the taxing authority’s right to collect against that property.  If you try to sell the home, the title company will pay out the buyer’s purchase money as follows:

1.  the first mortgage,

2.  a second mortgage (or third, or fourth), if any,

3.  the tax lien

4.  then if anything is left, it goes to you.

If you file a chapter 7 and actually discharge your personal income tax obligation for those old taxes, it still will not affect the lien.  The lien remains attached to your property.

You can try to fight the lien in bankruptcy court (probably unsuccessfully), if you have one of the following additional arguments against it:

1.  the lien was recorded after you filed the bankruptcy (this means that the automatic stay in bankruptcy would have prohibited the late recordation of the lien),

2.  the lien was never properly recorded, or

3.  the lien is over 10 years old.

So generally, even if bankruptcy discharges your personal liability for those back taxes, the lien stays attached to your home, and you will eventually have to pay it when you sell or refinance the home.

Can I withdraw my bankruptcy after I file if I change my mind or decide to settle my debts?

Kind of, but not in any way that really helps your credit.

Once you file bankruptcy, you will always have a public record that you filed bankruptcy.  This will always show on your credit.  You will always have to check the box on loan applications and job applications that asks, “Have you ever filed for bankruptcy?”

So let’s say you file bankruptcy on Monday, you decide to do debt settlement on Tuesday, and you decide to withdraw your bankruptcy on Wednesday.  It doesn’t work like this.

You can file a motion to voluntarily dismiss your own case.  It will be dismissed 30 days later unless the bankruptcy trustee believes that you have some kind of asset that he is really, really itching to go after and sell for your creditors.  However, if one of your creditors has filed a Motion for Relief from Stay, then doing your own voluntary dismissal will preclude (stop) you from filing a new bankruptcy case for 180 days.

You can fail to pay your court filing fee installments or fail to file documents, and it will eventually get dismissed.

However, none of this is “taking it back.”  It’s already been filed, and it will always be reported against you somewhere.

Can a creditor or bankruptcy trustee take my son’s 4 wheeler? His grandparents gave it to him last year.

Probably yes.

If your son is under 18, everything he owns is yours, not his.  He’s not an adult, and absent some kind of special trust account, his property is your property.
Even worse, when he was given the 4 wheeler, you had to register it, and odds are that your names are on title on it as well, and you are listed as owners.trustee sale 4 wheeler

So, although “everyone” knows that it is really his 4 wheeler, it’s not.  You own it, and it is a non-exempt asset under Utah law.  (“Non-exempt” means “not protected”).

This means that if a creditor gets a judgment against you, he could issue a writ of execution and take the 4 wheeler and sell it to pay off your debts.

If you file bankruptcy, a bankruptcy trustee may consider it a non-exempt asset which he can liquidate (sell off).  If a trustee does this, he will order you to take the 4 wheeler to an auctioneer so that it can be sold.  The trustee will then divide those proceeds between your creditors.

So what if he’s over 18 now?  Well, it depends on whose name is on title.  If your name is still on title, then you’re the owner.  If you transfer title to him, the trustee may look at it as a “fraudulent transfer” for less than fair value.  This is one you’ll have to talk to your attorney about.

 

Should I finance a car loan before I file bankruptcy?

It depends on your credit.

If your credit is healthy right now, then yes, if you need to purchase a car, then you should go out and finance something now while you can get a better interest rate.  When we file bankruptcy, we will simply reaffirm the car loan.  This means that we will check a box that indicates that you will keep the car loan with the same payments, same interest rate, and same balance.

This does not show bad faith in your subsequent bankruptcy unless:

a.  you are trying to finance an expensive, luxury vehicle to drive up your expenses in an attempt to qualify for a more simple chapter 7 case, or

b.  you fail to make payments to the lender and simply drive the car for a few months under bankruptcy protection before surrendering it back to the car dealer.

On the other hand, if your credit is bad, then you may want to wait.  In the three months after we file bankruptcy, you will get peppered with car loan applications in the mail.  Unfortunately, the interest rate on these is going to be over 25%.  On a fairly cheap used car, even this interest rate isn’t crippling, but if you can wait, do so.  After three months (from filing the case) you’ll receive your bankruptcy discharge.  After you get the discharge, you will start finding interest rates dropping to a better range (between 15% to 25% if you don’t have ORS or tax liens).

So, if your credit is good, you may want to finance something before going bankrupt, if it’s bad, wait til after.

 

 

My husband is working out-of-state. Does he have to go to court too, or can I go and appear for him?

Both of you have to go.

I get asked this question a lot because we have the oilfields in Wyoming right next door to Utah with very high-paying jobs (if you don’t mind working to the point of sheer exhaustion every single day).  When clients file bankruptcy, they are worried that the husband won’t be able to get off of work to come back for the the 341 Meeting of Creditors.  Sometimes, they just don’t want to lose a day or two of pay, because with this kind of job, you work while there’s work to do.

Unfortunately, you both have to physically appear for your meeting with the bankruptcy trustee.  Sometimes, it is possible to file a motion for the out-of-state spouse to appear telephonically, but it’s difficult.  Even if the motion is granted, the out-of-state spouse will have to make an appearance by telephone at the appointed hour, and he will need a notary or court official with him to review his driver’s license and social security card and testify over the phone that he is who he says he is.

So, you generally need to plan on both of you being there physically for that one meeting with the bankruptcy trustee.

 

What happens to the title loan on my car when I file bankruptcy?

Nothing, it’s still there.

Now here’s where I get a little technical:

If you file a chapter 7 bankruptcy, you can chose to reaffirm the loan, with the same payments, balance, and interest rate (which is generally over 250% here in Utah).  You can also chose to surrender the car and give it to the title loan company.  Bankruptcy wipes out your personal liability on that title loan, but, it is still attached to the collateral (your car).  This means that it wipes out the title loan for you, but not for you car, so if you want to keep the car, you still have to pay for it.

If you file a chapter 13, you can cram down the interest rate to a more reasonable one (like 5%).  You can then pay the title loan back as part of your bankruptcy plan over the next 36-60 months.  This lets you stop the bleeding with the interest rate and pay it off over time.  However, there is a very tiny chance that the title loan lender will object to your case because you recently took the title loan out, and they may demand the car instead.  I have never seen this happen, but it is possible.

I have updated this article here:

Can I change the interest rate on my car title loan in bankruptcy?

What happens if I sell my car or home or take out a loan without court approval in my Chapter 13?

Best case scenario:  nothing.

Worst case scenario:  dismissal.

When you are in an active chapter 13 case, you cannot sell your car, home, truck, trailer, or any substantial assets without court approval.  It is fairly simple to get this court approval by filing a Motion to Approve Sale of XXXX.

If you want to take out a loan to purchase a new car, or take out a 401k loan, student loan, home refinance, etc., you also must file a motion with the court to get approval for the transaction.

You are required to do this for any loan  you take out and for any sale of an asset (general rule of thumb > $500 = substantial).

Most people don’t do this when they take out student loans, but they should really have court approval.

Now if the bankruptcy trustee discovers that you have sold something or taken out a loan without court approval, the trustee will generally contact your counsel and ask what happened, ask why it happened, and direct your counsel to file a motion explaining the transaction and requesting ex post facto approval of the transaction.  Hopefully the court will approve the transaction, and that is the end of it.

However, there is always the chance that the bankruptcy trustee will move to dismiss your case for violating the confirmation order.  There is even an infinitesimally small chance that the trustee will request a finding of contempt against you for violating the confirmation order.  However, dismissal is bad enough.  Now you have to go through the whole bankruptcy process again.

It is an obnoxious step, but you really should contact your attorney and get approval before you buy or sell anything substantial and/or take out a loan.  That short phone call can save you a ton of heartache down the road.