All posts by johnhoffer

Joint Bank Account Pose a Potential Problem in Chapter 7 Bankruptcy Cases

As a general rule, unexempt property is sold by the bankruptcy trustee and the proceeds after sale costs are distributed among the debtor’s creditors.  Nice and convenient are liquid funds, such as bank accounts.  These are in a perfect state, ready to be distributed to creditors with little work by the Trustee.  Trustee’s love unexempt bank accounts.

The Washington State exemption statutes exempt only $500 for all bank accounts.  That means all bank accounts, combined, must be shoehorned within that ceiling of only $500.  With the crazy real estate values in western Washington, more and more debtors are having to opt for the state exemptions instead of the federal exemptions to protect their home.  That $500 ceiling on bank accounts can be a real issue.

A major problem are joint bank accounts.  The problem here is that debtors frequently forget to list them on the bankruptcy schedules.  Upon cross-examination by the bankruptcy Trustee at the 341 hearing, debtor’s suddenly remember that they are on their parents bank account or that they have a joint account with their minor children.  This joint ownership was usually set up a a matter of convenience.  Particularly in the case of an elderly parent, should something happen to a parent, their children who are on the joint account can easily withdraw funds to aid the parent.

The problem here is that if the debtor can withdraw the funds, then arguably so can the Trustee for the benefit of creditors.  If there are insufficient exemptions to protect the joint account, the funds in the joint bank account can be lost to creditors in the Chapter 7 bankruptcy.

One argument for the debtor is to claim that the funds were all sourced by the parent and, therefore, are not the debtor’s funds.  Therefore, the funds are not part of the debtor’s bankruptcy estate.  This may require extensive factual evidence showing that all the deposits and withdrawals funds came from and to the parent, and not the debtor.  But regardless of the source of the funds, if the debtor has an unfettered right to withdraw, then the source-of-the-funds argument may not be a winning argument.  The debtor would have to prove that he or she has restriction on the debtor’s right to withdraw, that the withdrawal rights were limited to situations benefiting the parent or child.  Proving that restriction, which probably was never put in writing, is going to be difficult if not impossible, especially if the only evidence is self-serving testimony of the debtor and the debtor’s family members.  That kind of testimony is just too convenient to be compelling to a judge.

For this reason, it is extremely important that the debtor disclose the existence of all joint account to the debtor’s attorney prior to filing the case.  If the exemptions are sufficient to protect the funds, fine.  If not, removing the debtor from the account might be advisable.  For reasons relating to how bankruptcy cases are filed, closing the joint bank account might not be advisable.  Better to just remove the debtor from the bank account prior to filing the case.

Department of Education is Needlessly Denying Disability Discharges

The Department of Education is trying to make it easier for borrowers to receive discharges on account of disabilities.. It has identified nearly 400,000 borrowers who qualified for a discharge and invited them to apply for a discharge. The agency also began suspending disability benefit offsets in cases where it is clear the borrower has a medical condition that won’t improve.

Borrower advocates claim this action is not enough.

http://www.marketwatch.com/story/this-lawsuit-claims-feds-needlessly-force-disabled-borrowers-to-lose-benefits-over-student-loans-2016-12-30

 

 

Statutory Living Expenses Can Be Used in the Means Test Even If Actual Expenses Are Less

The Fourth Circuit Court of Appeals has ruled that the statutory living expenses can be used to calculate the Means Test even if the debtor’s actual living expenses are less.

The case was decided today (January 4, 2017):  Marjorie K Lynch v. Gabriel Levar Jackson and Monte Nicole Jackson,  No. 15-01915-5-SWH in the Eastern District of North Carolina Bankruptcy Court.

The court found that the bankruptcy statutory language compelling the Means Test was unambiguous in that the statutory living expenses be used, not actual living expenses.  11 U.S.C.§ 707(b)(2)(A)(ii)(I).

Why Chapter 13 Can Be Better Than an Installment Agreement

Chapter 13 has several advantages over an installment payment agreement with the IRS.

  •  Interest and penalties stop.  With an installment payment agreement interest keeps accruing and the IRS is free to assess additional penalties.
  •  You may not have to pay all of your taxes.  This is complicated and depends on the nature of your taxes and your income.  It might also depend on the liquidation value of your bankruptcy estate.  But many times Chapter 13 debtors do not fully pay back all of their taxes.
  • In some cases the payments in a Chapter 13 plan are less than what the IRS will accept for an installment payment plan.
  • A Chapter 13 payment plan is only five years,and in some cases only three years.  The IRS has ten years to collect taxes, penalties, and interest–unless they obtain a judgment in which case they get up to twenty years to collect from the date of the judgment (assuming they renew the judgment after ten years which the IRS certainly can do in this state).
  • Other creditors may be discharged in a Chapter 13 bankruptcy.  Obviously, an installment plan with the IRS cannot do that.
  • The discharge of tax debts, if possible, is unconditional.  Later events, like not filing or paying taxes, do not affect the bankruptcy discharge.  Taxes handled by IRS payment plans and even taxes written off by the IRS through an offer-in-compromise can be revived if the taxpayer does something wrong after the fact.
  • Bankruptcy is a bit of a Jujitsu maneuver.   Instead of the IRS dictating what is acceptable to them, the bankruptcy court tells the IRS what they are going to get.  The balance of power shifts dramatically.
  • It usually is easier to predict the outcome in Chapter 13 than dealing with the IRS.  The bankruptcy process is rather mechanical if handled correctly, while dealing with the varied and mercurial personalities of IRS agents is more hazardous and unpredictable.
  • The discharge of debt in a Chapter 13 or Chapter 7 bankruptcy does not trigger income from debt cancellation.
  • If you are behind in your payments on  your house or car, Chapter 13 can give you time to get caught up.
  • Chapter 13 is a global solution to all of your debt problems, whereas dealing with the IRS only handles your tax debt.

The Federal Government Can Seize Your Passport Because of Your Tax Liability.

New laws permit the State Department can block a application for a new passport or to renew a passport.  The government can even seize an existing passport from a taxpayer who owes more than $50,000 in taxes.

This $50,000 threshold is deceptive, because  it includes penalties and interest.  Thus, it is entirely possible that a tax liability far under the threshold can exceed it once penalties and interest have been assessed.

The State Department is the agency that takes the action against the passport at the behest of the Internal Revenue Service.

Being proactive regarding your tax liability always a good idea, but now it is a better idea than ever before.  The IRS is less likely to refer the matter to the State Department if the taxpayer is engaged with the IRS to resolve the tax liability in some fashion.  Therefore, it is in the taxpayer’s best interest hire a professional sooner rather than later.

 

 

 

What If a Creditor Keeps Calling After I Have Filed Chapter 7 bankruptcy?

The second you file your Petition and Schedules with the court, a federal statute declares that all debt collection activity is stayed (i.e., stopped).  This is why the court immediately mails a notice to all of your creditors that you filed bankruptcy.  This automatic stay is one of the most beneficial things about filing bankruptcy.

One your debts are discharged, usually a little more than four months after you have filed your case, the automatic stay become permanent for all debts discharged.

The notice from the court that you have filed or that your debts have been discharged is usually enough to stop the harassment. by creditors.

Sometimes an incorrect address is used for a creditor and they do not get the notice, or if the creditor is a large corporation the wrong department of the corporation gets the notice.  In that case, they might keep trying to collect the debt.

Usually all it takes is a letter (not a phone call) referencing the case number and the court where you filed to get them to stop.  They might have to pay civil penalties and attorney fees if the don’t stop in addition to any damages you have experienced.  Most creditors are aware of their exposure to civil penalties and attorney fees and are highly motivated to avoid them.

If they do not stop, then a lawsuit is in order to get a judge to order them to stop,and  order them to pay the damages, penalties, and attorney fees.

 

What Do You Do When You Cannot Make Your Chapter 13 Plan Payments?

Well it depends.

It depends on why you can’t make the payments; why did you file Chapter 13 in the first place; and what kind of Chapter 13 you have.

How long is the  inability to pay going to last?

If your cash flow problem is temporary, perhaps you don’t need to do anything.  Some Chapter 13 trustees allow for a temporary suspension of payments or payments for less than required.  This happens frequently because of an illness for a hourly wage earner or an employee who goes temporarily on disability.

But if the failure to pay in full continues long enough, you will have to file and get court approval for an amended plan, or your case will be dismissed.

What kind of Chapter 13 do you have?

There are three basic drivers determining the amount of your Chapter 13 payments.

First, all priority claims must be paid in full.  That is non-negotiable.  If your reduced payments will result in priority claimants to be paid less than in full, your Chapter 13 Plan must be modified or your case will be dismissed.  What are priority claims is a topic for another blog post.

Second, your unsecured creditors collectively must be paid at least an amount equal to or greater than your unexempted assets.   Again, this is non-negotiable.

Third, there are a couple of cash flow analyses that are used, which based on your income, that set a floor which your plan payments must clear.

If your income goes down, then getting a new Chapter 13 Plan is an easy fix if you have the last type of Chapter 13 Plan.  But an amended Plan does not fix the first two types of Chapter 13 cases.    If you cannot makeup the shortage for those first two types of cases, then your case will be dismissed.

Why did you file Chapter 13?

If you filed to prevent a repossession of a vehicle or foreclosure on a house, and your income become insufficient to pay the secured debt on time, then you must recognize that you simply cannot afford to keep that asset.  You’re going to lose it; it’s just a question of when and how.

Your options.

You basically have four options if you can’t catch up quickly and informally:

  1.  File an amended Chapter 13 Plan and have the court approve it.

2.  Convert to a Chapter 7 bankruptcy.

3.  Dismiss your case.

4.  Hardship discharge.  You can get the benefit of the Chapter 13 discharge without completing the payment plan, but only limited circumstances.  That topic will the subject of another blog post.

 

 

Filing Two Bankruptcies Within a Year Can Be a Major Problem.

By statute the automatic stay in a bankruptcy case stops to most collection activity, so it’s really important.   It’s your protection from creditors.  However, you lose the automatic stay if you have filed for bankruptcy within the previous year.

The automatic stay will last only thirty days if you filed a second bankruptcy case within a year of your first case. You can file a motion to extend it beyond this 39 days, but the hearing for the motion must be held prior to the lapse of the thirty day period.  And there is no guarantee that the court will grant the motion to extend the stay beyond the 30-day limit.  You will need to show that the multiple filings were not in bad faith.

If the stay terminates at the 30-day mark, the property of your bankruptcy estate is protected but post filing income and later acquired property is not protect.

If you had more than two cases dismissed during the previous year, you won’t even get the initial 30-day stay that would apply if you had only one bankruptcy case pending within the past year. Again, you can file a motion to have the court reinstate the automatic stay, but it is unlikely the court will grant the motion.

Don’t Rely on the Breezley Case.

The Ninth Circuit Court of Appeals held in Beezley v. California Land Title Co. (In re Beezley), 994 F.2d 1433, 1434 (9th Cir. 1993) that debts not listed on Schedule F in a no-asset Chapter 7 case are discharged notwithstanding the failure to list the debt.

A no-asset case is a Chapter 7 bankruptcy where all of the debtor’s assets are exempt and, therefore, not sold and administered for the benefit of creditors; instead the debtor keeps all of his or her assets throughout the bankruptcy.

Many times I find clients are not especially motivated to track down all of their creditors when they learn about the Breezley case.  Here is a true-life example of what can happen when you rely on the Breezley case.

Client filed Chapter 7.  IRS refunded my client over $7,000 after the bankruptcy case was closed, despite the fact that my client owed the IRS a lot of non-dischargeable taxes, meaning the IRS made a mistake.   It normally keeps tax refunds where the taxpayer owes for other years.  Client didn’t have sufficient exemptions to keep this unexpected windfall. The bankruptcy trustee reopened the case and administered the newly discovered asset. This, of course, made Breezley inapplicable as the case was no longer a no-asset case. After the case closed–for the second time– a large creditor stepped forward claiming lack of notice and therefore no discharge of his debt. It seems that creditor was not listed.  The Breezley case was no help to us whatsoever as the case had been converted into an asset case when the IRS unexpectedly and mistakenly paid the debtor a tax refund.

The moral of the story is that you rely on the Breezley case at your peril.  You never really know, even after the case has been closed, that you have a no-asset case.  Thus, it’s always a good practice to list all creditors with correct and recent address.  It’s very important that the creditors get notice of the bankruptcy so they can note their records about the discharge of the debt.

And remember, there is the rule that inheritances from a death within six months of filing bankruptcy are part of the bankruptcy estate.  That’s another way to change a case into an asset case, which can be an unexpected big surprise.

 

Discharging Tax Penalties in Chapter 7 Cases Can Be Complicated

Discharging the penalties on taxes does not perfectly correlate to the discharge of the taxes.  The Bankruptcy Code has a different section dealing with discharging penalties on taxes, and the operation of that section can be more complex than discharging taxes:  Sections 507(a)(8)(A)(i) for discharging taxes versus 523(a)(7) for discharging penalties on taxes.

A case in the Northern District of California Bankruptcy Court has underscored how complex the analysis for discharging tax penalties can get.  In US v. Wilson, Case No. 15-cv-01448-VC  (January 21, 2016) assets were available in the bankruptcy estate to pay the taxes in question, but not for the failure-to-file and failure-to-pay penalties.  After the bankruptcy, the IRS seized assets to pay both penalties.  The taxpayer initiated an adversarial action in the bankruptcy case.  In that action, the IRS then conceded that the failure-to-pay penalty was discharged.   The parties disagreed whether the failure-to-file penalty was discharged.

Section 523(a)(7)(B) provides that, “A discharge under . . . this title does not discharge an individual debtor from any debt . . . to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty . . . imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.”

The issue was whether the taxpayer filing of an extension to file the tax return applied to the computation of the three-year rule for the discharge of the failure-to-file penalty.

The court held that filing of an extension affected the three-year rule for the purposes of the failure-to-file penalty.  The IRS previously conceded that the extension is not used in computing the three-year rule for the failure-to-pay penalty.

The reason for the ruling is found in the statute for the failure-to-file penalty, 26 U.S.C. § 6651(a)(1):

“In case of failure to file any [required tax] return . . . on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.”

This is to be distinguished from the failure-to-pay penalty which accrues from the original due date for the return, regardless whether an extension has been filed.

Thus in this case the taxpayer filed his return within three year-rule and, therefore, neither the tax nor the failure-to-file penalty were discharged.  But the due date for the return was beyond the three-year rule.  This is why the IRS conceded that the failure-to-pay penalty was discharged.