Bankruptcy filings continue to fall

Bankruptcy filings continue to fall.  Here’s a chart for filings for the twelve months preceding March 31.

Business and Non-business Filings Years Ending March 31, 2011-2015
YearBusinessNon-businessTotal
201526,130884,956911,086
201431,6711,006,6091,038,280
201337,5521,132,7721,170,324
201246,3931,320,6131,367,006
201154,2121,516,9711,571,183

 

Credit rating problems, redux

I had yet another new client  wanting to fix his credit rating because he had filed bankruptcy (Chapter 13) but the case was dismissed without a discharge of debt.

Again, the credit reporting bureaus merely report the fact that you filed bankruptcy.  They do not report the outcome of the case.

So, the bankruptcy filing is reported for ten years regardless whether you get much if any benefit from the bankruptcy.

Over one-half of all Chapter 13 cases in my part of the country fail to result in a discharge of debt because debtors cannot stay on a court imposed budget for three to five years.  In a Chapter 13 the order of discharge is not issued until after the debtor has completed the Chapter 13 payments over the three or five year life of the plan.  That order of discharge usually doesn’t happen because the debtor fails to make all the plan payments.  That’s why I strongly prefer Chapter 7 bankruptcies where no debt payments are required.

Of course, Chapter 13 is the preferred vehicle in many cases.  Just be aware that it’s on your credit report for ten years regardless of the outcome of the case.

Be Careful About Catching Up With Mortgage or Car Payments on the Eve of filing Chapter 7

I had a client recently who sold a truck to catch up with his residential mortgage payments just before filing Chapter 7.   The catch-up payments to the mortgage company were substantial.

These could be preferential transfers despite being paid toward a secured debt.  If the house was completely underwater, the creditor would have received on account of these payments more than what it would have received in a Chapter 7.   In this case, the debtor had plenty of exempted equity in his house, so the mortgage creditor was going to be fully paid no matter what.  Therefore, no preference existed.

I have not heard of a bankruptcy Trustee heartless enough to claw-back pre-filing catch-up payments like in this situation, but it’s something to worry about.  In this case, the amounts involve were enough to cause me to double check the preference statute.

Ted Cruz doesn’t know tax law

Ted Cruz announced his campaign for the presidency today.  Part of his platform is to imagine doing away with the IRS.

Not a bad idea.  His approach, however, is fundamentally flawed.  Ted wants to flatten the tax rate to just one tax bracket.  OK, but this is NOT the path to tax simplification.

Almost all of the complexity in the income tax code revolves around one question:  What is taxable income?

It doesn’t matter whether you have one or twenty tax brackets.  As long as you are taxing income, you have to define taxable income. History has proven that defining income to be mind-boggling complicated.  If you put three economists in a room and ask them for a definition, you will get ten different definitions.  It is such a difficult problem that the U.S. Supreme Court has never given a all encompassing, principled definition of income.  Nor does the tax code.  The tax code addresses situations as they come up, ad hoc style.   This is partly why the tax code is changed so frequently.

Does income include gifts and inheritances?  Does income include gains on property from inflation?  Does income include depreciation deductions that on resale that proved to be illusory?  Are punitive damages from an antitrust lawsuit income?   Can you avoid recognizing the income from selling your house when you roll the proceeds into a new house?  Are lottery winnings income?  Do losses from investments offset wage income?  When computing income, can self-employed individuals deduct part of their self-employment taxes like employers deduct when they collect payroll taxes?  Is interest deductible?   If a debt is written off, is the debt cancellation taxed like income?   Do students pay taxes on scholarships?  Are Social Security benefits income?

The list of questions like this is almost never ending.  Income is a slippery concept in a complex, multifaceted economy like ours.

Defining taxable income requires almost all of the tax provisions currently in effect.  The tax brackets are in Section 1 for individuals and trusts and Section 11 for corporations.  Count them.  That’s TWO code sections.  The balance of the other several hundred income tax code sections would not be affected by this so-called simplification.  Also, it would leave in effect the  payroll taxes, the estate and gift tax regime, and a host of other excise taxes on things like gasoline and home heating fuel.  And then there are the thousand or so tax codes sections dealing how to collect all these taxes.   None of these sections would be affected by compressing the tax brackets into just one flat tax rate.  What Ted Cruz is suggesting simplifies exactly TWO codes sections, in a tax regime containing THOUSANDS of other code sections.

I think Ted is a little clueless about how income tax works.   Tax bracket simplification is not the same as tax simplification.  It’s a farce to pretend otherwise.  The two tax code sections Ted is proposing to simplify comprise less than .001% of the tax code.

 

Dismissal of bankruptcy case does not avoid it from being reported by credit rating bureaus

I have seen cases where debtors voluntarily dismiss their Chapter 7 case.  They did not receive a discharge of debt.

Yet they were upset to learn that the credit reporting bureaus still reported their bankruptcy, even though the debtors did not receive a discharge of debt.

The federal statutes on this permit the credit reporting bureaus to report the fact that the debtor filed Chapter 7, regardless of the outcome of the case.  They report merely that the Chapter 7 was filed.  They usually do not report the outcome of the case.  Most people might assume that a discharge order was entered.  But that is not material.  The statute permits the credit reporting bureaus to report the bankruptcy, regardless of the outcome of the case.

So don’t file the Petition and Schedules for Chapter 7 lightly.  First of all, the Court may not even permit a dismissal.  Second, you are still going to take a hit on your credit rating even if you get dismissed out of the case and never discharge any debt.

In the future, taxes from late filed returns might not be discharged in a Chapter 7 bankruptcy

In some Appellate Ciruits, taxes from returns filed late are never dischargeable in Chapter 7.  A new decision in the 10th Circuit has just expanded the number of circuits where this rule applies.  The Ninth Circuit, which covers Washington State, does not follow this rule.  However, the United States Supreme Court might in the foreseeable future hear a case resolving this issue.  If the high court rules against taxpayers, many people with tax liabilities from late filed tax returns will never be able to discharge those liabilities in Chapter 7 bankruptcy.  Currently, residents of Washington state can sometimes discharge those taxes.

If you have tax liabilities that are dischargeable in Chapter 7, it might behoove you to file bankruptcy sooner rather than later, as the ability of discharge those taxes might be lost at some point in the future.