CAN UNPAID TAXES BE DISCHARGED IN A CHAPTER 7 BANKRUPTCY?

Most people believe that unpaid taxes cannot be discharged in a chapter 7 bankruptcy. However, they may actually be dischargeable in some circumstances. If the below criteria are met, then your unpaid federal income taxes will be dischargeable:

1. The taxes must be more than three years old. The clock starts ticking the date the tax return is due, not when the return was filed. If the tax year in question is 2007, then the return would typically be due on April 15, 2008 and that is the date where you would start your analysis. Any extension filed delays the start time to the date the return was due under the extension;
2. The tax return (or equivalent notice or report, if required) for the year in question must have been filed more than two years prior to the bankruptcy filing;
3. The taxes must have been assessed by the Internal Revenue Service and the assessment must have occurred more than 240 days before the bankruptcy was filed;
4. The tax return for the year in question cannot be fraudulent; and,
5. The taxpayer has not engaged in any activity that was a willful measure to evade or defeat the tax.

Please note that there are intricacies to each one of these criteria so it is important to have a bankruptcy attorney review your situation prior to filing. Additionally, you will also need to obtain Account Transcripts from the IRS for the years in questions. However, contrary to popular belief, tax can sometimes be discharged in a chapter 7 bankruptcy. Contact one of our bankruptcy attorneys for more information.

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HOW TO RECOVER AFTER BANKRUPTCY

A lot of clients ask what steps they should take after a bankruptcy is completed to rebuild their financial situation. The first, and probably most important, is to create a post-bankruptcy budget. Most bankruptcies results from over spending or incurring too much debt that can never be repaid. Each person should create a budget after completing a bankruptcy to avoid falling into that situation again.

Secondly, start saving money as soon as you can. This may sound obvious, but many clients use the money they save from the bankruptcy to spend on other items, a lot of time unnecessarily. If you are beginning a bankruptcy, make sure you are putting together a savings plan as well.

Finally, take steps to restore your credit after a bankruptcy. Many companies will offer credit to individuals with a recent bankruptcy, but the terms will include low maximum balances and high interest rates. In order to repair your credit, it is important for individuals to use this credit responsibly so they can improve their credit score as quickly as possible.

For more tips on post-bankruptcy option, contact one of our bankruptcy attorneys for a free consultation.

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STUDENT LOANS STILL NON-DISCHARGEABLE IN BANKRUPTCY

Last month, the Supreme Court declined to hear an appeal aimed at allowing student debts to be more easily discharged in bankruptcy. While there has been some pressure to make certain students loans dischargeable, it appears under the current structure, Congress will need to pass a law allowing for these debts to be discharged.  Until then, only very specific students debts that meet all requirements will be dischargeable in bankruptcy. For more information on this, please feel free to contact a bankruptcy attorney at our office.

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CAN I MAKE TOO MUCH MONEY FOR CHAPTER 7 BANKRUPTCY?

The federal bankruptcy statute governs all personal and commercial bankruptcies.  According to the statute, you have to "qualify" for a Chapter 7 bankruptcy.  There is a maximum household income level based on the amount of people living in your household.  Additionally, even if you are below that income level, if you have too much disposable income, measured as income minus necessary monthly expenses, the trustee can contest your discharge as an abuse.  In this case, a hearing could be held.

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CAN TENANCY BY THE ENTIRETY PROTECT MY HOUSE?

In Illinois, there are several ways to take title when more than one person owns real estate.  Generally, primary residences of married couples are owned through tenancy by the entirety, which offers certain benefits, including additional protection from creditors.  In general, if one spouse is filing bankruptcy, and the property has been owned through tenancy by the entirety since before the "look-back" period, then any equity in the property would be protected and exempt.  However, if both spouses file bankruptcy, or if the property has not been owned in this manner, any equity above the state exemption level could be at risk of seizure by the trustee.  Talk to one of our bankruptcy attorneys for additional information about protecting the equity in your house.

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CAN BANKRUPTCY DELAY A FORECLOSURE?

Yes, a bankruptcy can delay a foreclosure, but how long is a different question.  When a bankruptcy petition is filed, all ongoing litigation and collection activities must be stopped due to the automatic stay.  A lender involved in a foreclosure must comply with this requirement as well.  The automatic stay usually remains in effect for the length of the bankruptcy, which can be at least a couple months. However, if a lender that has started the foreclosure proceedings and does not believe the debtor will be attempting to keep the property, they can file a Motion to Lift the Automatic Stay, which would allow them to continue with the foreclosure proceedings.  As a result, a bankruptcy may only delay a foreclosure a couple weeks or a month in some instances, while it can delay the process several months in other cases.  Contact a bankruptcy attorney below for additional information.

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CAN I WITHDRAW A BANKRUPTCY PETITION ONCE IT IS FILED?

The bankruptcy code details exactly when a debtor can withdraw a petition that is filed with the bankruptcy court.  In order to be allowed to withdraw, a petition must be filed and approved by the court itself.  The major issue the court considers is whether the creditors will be prejudiced by allow the debtor to withdraw, however, the court will consider other factors as well.  If you are considering withdrawing a petition, contact your bankruptcy lawyer for more information on if you may qualify.

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WHAT PAPERWORK DO I NEED TO GATHER PRIOR TO FILING BANKRUPTCY?

Before filing bankruptcy, your lawyer will require some documents from you in order to complete your bankruptcy petition or prior to the 341 creditor's meeting.  Typically, your bankruptcy attorney will need you to complete a general questionnaire and produce a recent credit report, three years of tax returns, a recent paystub, copies of certain statements or bills, bank statements, and possibly other miscellaneous documents depending on your situation.  If you are unable to produce these documents, talk to your real estate lawyer to explore your options.

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CAN I INCLUDE ANTICIPATED EXPENSES/DEBTS ON MY BANKRUPTCY PETITION?

Unfortunately, only debts and expenses incurred as of the time the bankruptcy petition is filed can be included on the bankruptcy petition.  If you are expecting to incur additional expenses in the future, most individuals would be well served to wait to file their petition until they are charged these expenses, unless they are under a deadline to file, for example, if they are facing a foreclosure.  Another option would be to amend the petition and add the expenses at a later date after filing, assuming the bankruptcy case is ongoing when the debts are incurred.  For more information about this issue, contact a bankruptcy attorney within our office to discuss this further.

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HOW LONG DOES A TRUSTEE HAVE TO REVIEW MY CASE?

In a Chapter 7 bankruptcy, after the 341 Creditor's Meeting a trustee will take time to review the testimony and information from the debtor.  They will then make a determination of whether there are any assets of the debtor that are non-exempt and can be seized for the creditors.  Typically, this process takes about a week or so, however, a trustee does have the right to keep a case open if they feel they need more time to review the information.  For cases with extensive documentation or discovery, this process can sometimes take up to several months.  It is important to understand the distinction between a trustee reviewing extra documentation and objecting to a bankruptcy discharge.

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HOW DOES CHAPTER 13 BANKRUPTCY AFFECT A SECURED DEBT?

When filing a bankruptcy, a chapter 13 can allow you to catch up on any late payments on secured debts through a no-interest repayment plan.  A secured debt is a debt that is secured by an asset, such as a mortgage or car loan.  If you are behind on these payments, but still want to retain the asset, a chapter 13 bankruptcy will allow a no-interest payment plan.  Assuming you complete the repayment plan successfully, you will simply need to continue the monthly payment moving forward after the bankruptcy, and you will be allowed to retain the asset.

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HOW DO I ESTIMATE THE VALUE OF MY HOUSE FOR BANKRUPTCY?

In a bankruptcy proceeding, you will be required to estimate values of your property, including any real estate you own.  The process for estimating the value of your house depends the amount of equity you have.  If the equity is significantly under the exemption amount, or there is no equity, it can be as simple as using an online estimation tool.  However, if your equity amount is near the exemption level or above it, you may need to utilize a more involved process.  Ultimately, the most accurate tool is to have a real estate broker conduct a comparative market analysis on your property, but that is not always an option.  The more information you have to justify the value to the trustee the better off you will be.  Usually, for properties at or above the exemption level, it is best to undertake at least a couple different methods for determining the value of your property.

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WHAT HAPPENS TO MY TAX REFUND IF I FILE BANKRPTCY?

Generally, if your 341 Creditor's Meeting takes place during or right after tax season, the trustee will inquire about your tax refund.  If your tax refund is over $1,000, you will want to use your personal property exemption to protect it if possible.  If you do not have enough of the exemption left to protect the refund, the trustee will have a right to seize the property if they choose to do so.  If the refund has already been spent on legitimate expenses, there is really nothing the trustee can do at that point.

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CAN AN INDIVIDUAL FILE CHAPTER 11 BANKRUPTCY?

Technically speaking, yes, an individual can file a Chapter 11 bankruptcy, although it is very rarely done.  Chapter 11 of the bankruptcy code provides a reorganization plan for businesses, who cannot file a chapter 13 bankruptcy like an individual can.  If you are looking for a no interest payment plan on your debts, a chapter 13 bankruptcy would generally be more appropriate for a person than a chapter 11.

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IF I OWN A BUSINESS, HOW DOES THAT AFFECT MY BANKRUPTCY?

Many clients have some ownership in a small business that needs to be addressed during the bankruptcy process.  In a chapter 7 bankruptcy, any assets of the business may be at risk for liquidation if the debtor is a 100% owner of the business.  These assets can include equipment, inventory, accounts receivable, etc.  Also, the most recent tax return of the business must be provided to the trustee for review.  Typically, if there are no significant assets of the business, the company will not be affected by a personal bankruptcy and the business can continue to operate after the proceeding.

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HOW LONG DOES THE BANKRUPTCY PROCESS TAKE?

The length of your bankruptcy is going to depend on which chapter you file and in which jurisdiction your petition is filed.  Obviously, because a chapter 13 bankruptcy is a repayment plan it is going to take longer than a chapter 7, which is a simple discharge.  Typically, a chapter 7 bankruptcy will take 3-4 months to complete, however, it can take slightly longer if filed in Cook County because of the amount of cases filed in that jurisdiction.  A chapter 13 bankruptcy will usually last a minimum of 38 months if completed by the debtor, but can take up to 62-64 months for a longer repayment plan.  As noted earlier, the repayment plan will be based on the income and assets of the debtor.

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IN WHICH JURISDICTION DO I FILE BANKRUPTCY?

By federal law, your bankruptcy should be filed in the district where you have resided for at least 91 days of the last 180 days.  This is where you would have spent the majority of your time by the courts description.  However, you need to have resided in this district for at least two years in order to use the exemptions of that district.  Otherwise, you are required to the exemptions of the previous district where you resided.

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DO I HAVE TO BE A U.S. CITIZEN TO FILE BANKRUPTCY?

Section 11 U.S.C. 109 of the bankruptcy code details who is eligible to file bankruptcy under federal law.  In this section, it does not state that an individual needs to be a US citizen to file bankruptcy, or even possess a green card.  The law has since been very clear that a debtor just needs to establish residency, that is, live in a jurisdiction long enough to satisfy the statue, in order to file bankruptcy.  A social security number is not required either, although it is helpful to have one.  For any other bankruptcy eligibility questions, please contact one of our bankruptcy attorneys for further information.

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WILL A BANKRUPTCY AFFECT MY RETIREMENT SAVINGS?

When filing a bankruptcy, whether your retirement funds will be affected depends on what vehicle or investment is housing your retirement assets.  Most designated retirement accounts, such as an IRA, 401(k), 403(b), pension fund, and social security benefits will all be exempt from your bankruptcy case.  This means that the trustee will not be able to seize your assets in order to repay your creditors.  However, if your retirement assets are in the form of equity in your house or other non-exempt assets, then those funds could be unprotected in a Chapter 7 bankruptcy.

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DO I HAVE TO INCLUDE THE INCOME OF MY CO-HABITATING PARTNER ON MY BANKRUPTCY PETITON?

As you may recall from previous posts, when filing a bankruptcy petition, you are required to provide information about your household income in order to determine your eligibility for a Chapter 7 bankruptcy or your payment amount for a Chapter 13 bankruptcy.  In Illinois, if you are co-habitating with a partner or living with a spouse, you must include their income as part of the household income.

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