Category Archives: Taxes and Bankruptcy

Property Tax Lien and the Automatic Stay of Bankruptcy

One common question in bankruptcy comes from filing debtors who may be facing a property tax lien and foreclosure on their property. They want to know if the automatic stay in their bankruptcy case will stop the foreclosure process. Continue reading

How Filing Bankruptcy May Effect Your Income Taxes

Every year at this time the question arises about how filing bankruptcy might effect your income taxes. Depending on the type of bankruptcy you file, the only difference for income tax purposes in filing a Chapter 7, Chapter 11, or a Chapter 13 is in the paperwork. Continue reading

Are Governments Inadvertently Encouraging Bankruptcy?


Taxes (Photo credit: Tax Credits)

Sometime, the only protection you have in keeping a home when debts overcome you is to file for bankruptcy protection. In light of the recent foreclosure crisis in America, it is a real shame what some state and local governments are starting to do to the elderly and disadvantaged in regards to property taxes. Are the property taxing authorities of governments inadvertently encouraging bankruptcy for our elderly and disadvantaged homeowners today?

According to the Associated Press, the elderly and other disadvantaged homeowners are losing their homes for as little as a few hundred dollars owed in back taxes. A recent report from the National Consumer Law Center (NCLC) released today was used to support these allegations. John Rao, the report’s author and an attorney for the NCLC, said that “arcane property tax laws and misinformation among consumers can cause some people to lose their homes for as little as $400 in back property taxes.”

Local governments supported through property taxes have the authority in most states to be able to attach tax liens on homes when property owners fall behind on their taxes. Most property taxes are paid through escrow accounts when there is still a mortgage on the property. A lot of the problems in keeping up with the payments on property taxes arise when there is no longer an escrow account and service provider to pay the annual taxes.

Rao believes that outdated state laws allow big banks and other investors to reap windfall profits by buying houses foreclosed on by tax liens at ridiculously low prices, often the cost for what is owed for taxes, and then reselling them for a huge profit. This more often than not happens to the elderly and disadvantaged homeowners. Rao said, “the consequences are devastating to individuals, families, and communities.”

With the weak economy squeezing tax revenue because of low property values, the local governments are clamping down on late tax payments. More homeowners are also having to fight the local authorities in tax evaluation annually to prevent their taxes from becoming too much to bare. The taxing authorities seem to have no shame when it comes to collecting what they consider their revenue.

The NCLC report suggested state governments should make it easier for homeowners to retake their homes after a tax lien sale, not harder; the states should limit the interest and penalties investors can charge; the states should increase court oversight; an installment plan should be considered to allow homeowners to pay back taxes; and homeowners should be given a clearer and fairer notice of understanding their rights under the current laws.

It is the opinion of this writer that it is becoming a national scandal and a shame for the local taxing authorities to behave in this manner, especially to the elderly, who should be facing their leisure years at home instead of years in the streets they might otherwise face.

Filing for bankruptcy protection might temporarily hold off the taxing authorities, but certain taxes are exempt from bankruptcy discharge. Shouldn’t it be that the elderly is exempt from certain property taxes?

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Tax Refunds Are Being Spent on Bankruptcy Legal Fees

Our rental tax refund treat to ourselves was t...

Our rental tax refund treat to ourselves was this desk. It is a Paul McCobb Planner Group desk. Just delivered today. Thank you Swank. (Photo credit: Wikipedia)

At a time when Americans who chase the American Dream should be spending their tax refunds on lavish lifestyles and dream vacations, many are spending their tax refunds on trying to get out of hock. According to the National Bureau of Economic Research (NBER), more than 200,000 Americans will use their tax refunds to pay for bankruptcy filings and legal fees in 2012.

Bankruptcy filings were down 12 percent in the first quarter of 2012 compared to the first quarter of 2011, but those statistics have not changed what NBER has known for a long time: “At the first part of the year, when Americans receive their tax refunds, there almost always is a spike in personal bankruptcy filings.”

Since the passing of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, bankruptcy costs have continued to soar because lawyers must now verify more today than they did before the law change. Time is money to all professions and especially to the legal profession. The U.S. Government Accountability Office says that legal cost for bankruptcy administrative and legal fees has grown from $921 in 2005 to $1,477 in 2007.

In many cases, the only way a bankrupt debtor can afford to pay the legal costs to file bankruptcy is their tax refund. The average tax refund last year was $2,913, enough to pay to file for bankruptcy.

The 2005 laws were supposedly passed to slow down the abuse of filing for bankruptcy protection. Instead, the Great Recession brought record numbers of bankruptcy filers to the bankruptcy courts. Now that the recession has officially ended, bankruptcy filings are beginning to slow down again, but many wonder if it is because now so many can not afford to file.

Many have questioned whether raising the costs of bankruptcy filings is the way to slow down abuse. The argument goes that desperate people often might use desperate means to accomplish their short term goals. Another argument offers that the ones who really need bankruptcy protection are the ones who will be unable to pay the fees. The various arguments has caused one law professor at the University of Illinois to opine, “It just means that financially distressed people are not necessarily getting the help they need.”

It is a sad day for many Americans when the search for the American Dream has become a simple search for the almighty dollar, in of all places, a tax refund. This, just to get out of hock.

Filing for bankruptcy protection should be about a chance to start over for those who have fallen on hard times in their pursuit of happiness. Instead, for some, it might quickly be becoming an end to the means. Some of these Americans not able to file for protection may not be experiencing a physical debtors prison, but will their ultimate fate be the prison of the streets?

With everything financially costing us today from birth to death, and from having to not having, where does it all end?

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Tax Refund and How It Might Affect the Means Test

US Real Median household Income

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Means Test and a Chapter 7

Many questions arise on bankruptcy forum websites about the Means Test for determining whether or not a debtor, considering filing bankruptcy, can file a Chapter 7.

The Means Test is a test devised by Congress in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. Basically, it is given to those debtors wanting to file a Chapter 7 who do not automatically qualify by being below the median income for a family in the area in which the potential filer lives. If the wannabe Chapter 7 filer is above the median income, they can take the Means Test to determine how much their monthly disposable income is, and if under a certain amount may qualify for filing Chapter 7.

As part of the Means Test, the bankruptcy court considers your average income for the past six months, called the look back period. They look back six months in search of bonus income and the like. Consequentially, income tax refunds usually get the attention of wannabe filers. They want to know how the bankruptcy court might view the refund in relation to the look back period. Their concern is not completely unfounded.

Bankruptcy Law Provides Courts with Leeway

Bankruptcy law in the area of the Means Test provides bankruptcy courts with a lot of leeway in determining conclusions about the look back period. For instance, the trustee might look back and determine the unearned income given to a tax filer is new income that has been refunded to the filer. In that case, the bankruptcy court may use part or all of the refund as income in determining the Means Test.

Most bankruptcy courts do not consider a tax refund as new income. Normally, a tax refund is considered income already declared for Means Test purposes, but again, the bankruptcy court has a lot of leeway in making those determinations. If the trustee handling a bankruptcy case decides a certain portion of a tax refund is new income affecting the Means Test, it will be up to the filer to petition the bankruptcy court for a ruling on the matter by the Bankruptcy Court Judge.

The result of considering a portion of your tax refund as new income might have the affect of moving you into a Chapter 13 bankruptcy in lieu of a Chapter 7. Many courts will not consider looking at the tax refund unless the filer is above the median income.

Even if the tax refund does not put you into a Chapter 13, the refund can still be considered an asset in any type of bankruptcy filed. In a Chapter 7, a tax refund unspent will be regarded as an asset to be exempted or used to pay off unsecured debt.

Spend It, Exempt It, or Lose It

That is why many bankruptcy lawyers will advise their Chapter 7 clients to spend the refund before you file when the possibility exists the refund may not be exemption by state or federal exemptions. One blogger put it this way in regards to a tax refund before filing bankruptcy: “Either spend it, exempt it, or hand it over.”

In any regards, if you are planning on filing a Chapter 7 bankruptcy, check with a bankruptcy lawyer before doing anything with your tax refund before filing.

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IRS Offer in Compromise

Seal of the United States Internal Revenue Ser...

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Nature of the IRS on Income Tax Debt

The Internal Revenue Service (IRS) understands that its tax payers can have financial difficulties ultimately causing you to go bankrupt. Contrary to the myths and images you might have about the IRS, the government is only interested in getting what it is realistically owed them.

The IRS is really like any other creditor except they are more prone to follow the federal law and guidelines than most when collecting their debts, they can be more reasonable to deal with than most creditors, but they still have unprecedented power to collect debts when the federal law favors them in doing so.

The two primary laws affecting what the IRS will or will not do when it comes to an income tax debt are federal tax law and federal bankruptcy law. Either or both types of federal law can be very complicated for the average taxpayer to understand without professional legal help.

When you get into financial trouble and behind on your income tax debt, expect the IRS to ask for penalties and interest like any other creditor. Like any other creditor who might extend you a loan, the IRS deserves to be paid on time, but when you cannot, the IRS has built into the federal law ways you can pay them based on a fair evaluation of your given circumstances.

Income Tax Debt and Bankruptcy

Federal law allows for income tax debt to be discharged in a bankruptcy filing under certain circumstances within certain guidelines. The tax can be discharged if the tax owed was due more than 3 years in the past, the income tax debt at issue was included in a tax return more than 2 years before the filing of the bankruptcy, the income tax debt was assessed by the taxing authority more than 240 days prior to filing for bankruptcy, and the debtor filing the return must not have attempted to evade paying the tax.

Income Tax Debt and an Offer in Compromise

Before handling an income tax debt through the bankruptcy process, the IRS will also consider an Offer in Compromise. An offer in compromise is a settlement made with the IRS for less than the full amount you owe, and normally requires you to provide evidence to the IRS for a financial hardship in paying the full amount of taxes, penalties, and interest owed.

According to the IRS government website, they give this warning to prospective applicants: “We generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time. Explore all other payment options before submitting an offer in compromise. The Offer in Compromise program is not for everyone.”

To be a successful applicant for an offer in compromise, you must meet all the Offer Terms listed in Section8 of IRS Form 656, including filing all required tax returns and making all payments.

Because and offer in compromise is complicated and sensitive in nature, it might be wise to consult with a tax attorney and/or a bankruptcy attorney before making such an offer.

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What are Your Options on Inheritance Before Filing Bankruptcy?

Many of you who are needing to file bankruptcy sometimes come into a small financial windfall in the form of an inheritance. What are your options on inheritance before filing bankruptcy?

To help you understand your options if you suddenly come into an inheritance and are considering bankruptcy, lets assume you shared an inheritance with siblings after one of your parents suddenly passed away.

Let us assume you live in Texas, you have not yet filed for bankruptcy, you just got a new job for the first time in three years, you owe a credit union money for an unsecured loan of $7,500, you owe over $75,000 in credit card debt, a collection agency is currently threatening a lawsuit against you, you have student loan payments due that are incurring interest, and you have back taxes due. Your inheritance will be around $25,000 for your share. What are your bankruptcy options to protect yourself?

Option number one is to hold off on filing bankruptcy until the inheritance is settled. The bankruptcy code prevents you from giving preferential treatment to creditors up to twelve months before you file for bankruptcy protection. Bankruptcy court trustees pay particular attention to preferential insider treatment like paying off the debt of a family member, but here are some options for using the inheritance money during the time before filing for bankruptcy:

  • You might use the money to pay off debt that is exempt from discharge in a bankruptcy. Under the illustrated assumptions made, you might use the inheritance money to pay off your student loans and/or back tax burdens. This may be done if your filing either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

  • If you want to keep some of the money for yourself, you may be able to dump some of the money in an eligible Individual Retirement Account (IRA).

  • If most of the inheritance is coming from the sale of the home of the deceased, you may rent the home from your siblings using the Texas homestead exemption for your percent of ownership. After the bankruptcy is closed, you can sell the home and keep the proceeds.

  • If willing, your siblings could buy out your share of the inheritance before you file bankruptcy and before the estate of the deceased is settled. The bankruptcy court trustee would most likely give you the the option of buying back your part of the home received in an inheritance anyway if the home becomes a part of the bankruptcy estate.

The second option is to go ahead and file for bankruptcy protection realizing some inheritance estates take years to settle. Regardless of how long it takes the administrator to distribute the assets from the estate of the deceased, your right to any future distribution is a part of the bankruptcy estate. If the asset is not exempted, it is subject to liquidation by the trustee in a Chapter 7 bankruptcy, and he may wait on a settlement of an inheritance as long as it takes.

Theses are just a few of the options you might consider when dealing with bankruptcy and inheritance. If you have inheritance and bankruptcy issues, it may be wise to consider consulting with a bankruptcy lawyer. Let us help you find a bankruptcy attorney in your area of Texas that will answer you questions about bankruptcy laws.

We can no longer afford our mortgage payments? What are our options?

We need help with modifying our home mortgage.  It is already an interest-only loan, but because of an increase in property taxes, we can no longer afford to make the payment.

If you can no longer afford to pay your home mortgage, you can consider one or more of the following approaches.  These approaches include methods for modifying your home loan as well as other approaches to address the issue.

Contact your lender.

You are not the first person who has experienced difficulties in making your mortgage payment in these times.  It is worth speaking with your lender to see if they are willing to work with you on a lower interest rate or other approaches to make your payment affordable.  But as you already have an interest-only loan, your options may be limited.

In addition, obtaining a break from your lender may not be an easy process.  It generally will take a lot of time on your part speaking with various individuals within your mortgage lender; this is in large part because the lender wants you to pay what you originally agreed to pay.  However, it is not in the lender’s best interest not to take the house from you, as this means they have to deal with selling it while they are out a monthly payment stream from the mortgage, so negotiating a better deal with your lender is a possibility.

File bankruptcy.

As a last resort, declaring bankruptcy is an option.  A Chapter 13 bankruptcy is specifically designed for you to propose a plan to repay various debts—including your home mortgage—over a period of up to five years.  This proposal can include a re-negotiated home mortgage, such as a lower interest rate, a longer payment term, or the option to roll past due payments back into your total balance due.

Protest your taxes.

Your local property tax authority should notify you of the basis of your home for tax purposes each year.  When you receive this notification, there is a timeframe during which you can file a protest to lower the amount used to calculate the property tax.  To successfully protest the property tax basis, you will need evidence that your current property tax basis is too high, such as the amount that comparable houses have sold for in your area.  A real estate agent will have access to the resources needed to pull comparable sale amounts for houses similar to your home to see if your home has a tax basis that is too high.


If your mortgage payment has become too expensive because of changes in property taxes, your income, or other factors, it may simply be in your best interest to sell your home and move.  As a home is often a precious place of shelter and memories, this may be a difficult option to consider.  But downsizing may be the simplest way to reduce your monthly mortgage to something you can afford.

You should considering the above information as general in nature.  When considering any of the above options, it is wise to speak with an attorney, who will know the tax, bankruptcy, and other applicable laws in your state, to determine what approach is the best for your specific situation.

How does filing bankruptcy affect my back taxes?

If you are experiencing financial difficulties because of a loss of employment, divorce, a lawsuit or judgment, or for other reasons, you may be considering bankruptcy as an option to alleviate the financial liabilities and accompanying stress.  Bankruptcy is a legal process a person can use to get a fresh start—that is, to restructure or eliminate their debt so that they can afford to live on their existing income and begin to re-establish their credit.  While bankruptcy should not be used without exhausting other options and confirming it will help in your specific set of circumstances, it is a viable option that you may need to consider.

It is possible that part of the financial obligations that you cannot afford to pay includes taxes.  Whether payroll, property, or state or federal income tax, taxes can amount to a significant obligation.  Therefore, an important question you may be asking is: Can a bankruptcy be used to eliminate my back taxes?  The answer is yes, but it depends on the timing and classification of the taxes involved.

What types of taxes can (and cannot) be discharged by filing bankruptcy?

The taxes that can be discharged by filing bankruptcy does not have a straight-forward answer simply based on the type of tax.  For example, it is not as simple as saying that federal income tax liabilities are always or are never dischargeable.  But there is a classification system used to categorize taxes when considered in a bankruptcy situation.  This system uses two classifications: a Priority Tax Claim and a General Unsecured Tax Claim.

Priority Tax Claim

A priority tax claim is never dischargeable in a bankruptcy; you will have to pay 100% of these taxes.  A tax is a Priority Tax if it meets one or more of the following criteria:

Sales Tax and Income Tax Withholding

These taxes (also known as Trust Fund Taxes) are often collected by a business (from the customers and employees, respectively) and should be remitted to the appropriate taxing authority.  Whether you failed to collect these taxes or you collected them and did not pay them to the appropriate taxing authority, these taxes are not considered your property and therefore they must be paid even in a bankruptcy.

Taxes Secured by a Lien

Whatever the type of tax, if the taxing authority has filed a lien on your property related to the tax, the tax is considered a Priority Tax up to the available value of the property not already covered by a higher-priority lien and must be paid even in a bankruptcy.

For example, take a situation where you own a home worth $200,000, have a mortgage with a balance of $180,000, and a tax lien (whether from property or other taxes) of $30,000.  In this situation, the mortgage lien is the first or higher- priority lien, so it is secured up to the full $180,000 value of the mortgage (because the property at $200,000 is worth more than the mortgage).  This leaves $20,000 (i.e., $200,000 minus $180,000) in value that can be used to secure part of the tax lien.  Therefore, this $20,000 amount is considered a Priority Tax.

Income Taxes for Previous Three Tax Years, Assessed in Past 240 Days, or Related to an Unfiled or Fraudulent Return

Income taxes are Priority Taxes if they are a). due for tax returns filed in the three tax years preceding the date bankruptcy is declared, b). tax assessed within 240 days of the date when bankruptcy is declared, or c). tax due on an income tax return that was never filed by the taxpayer or that was filed in a fraudulent manner.

General Unsecured Tax Claim

A General Unsecured Tax Claim is a tax that is either old or not secured by a lien against a property.  In short, these taxes are ones that do not qualify for any of the above methods of becoming a Priority Tax.

General Unsecured Tax Claims can be discharged either fully or partially as a part of a bankruptcy depending on the type of bankruptcy filed.

Do the types of taxes that can be discharged vary depending on the type of bankruptcy filed?

While the types of taxes that can be discharged in a bankruptcy are not dependent on if you file Chapter 7 or Chapter 13 bankruptcy, the amount of tax that can be discharged is dependent on the bankruptcy type.

As noted above, Priority Tax Claims must be paid at 100% by the taxpayer as a part of a bankruptcy, regardless of the type of bankruptcy the taxpayer declares.  For General Unsecured Tax Claims, a Chapter 7 bankruptcy can be used to fully discharge the tax liability, so the taxpayer will pay 0%.  With a Chapter 11 bankruptcy, the taxpayer will pay a percentage between 0% and 100% of the General Unsecured Tax Claim.  The percentage of the General Unsecured Tax ultimately paid will vary from case to case, depending on the specific situation of each individual’s bankruptcy.

Can a bankruptcy attorney help me determine if my tax liability can be discharged through bankruptcy?

Yes, a bankruptcy attorney will have the experience, training, and knowledge of the bankruptcy laws to review your specific situation and determine if a bankruptcy can be used to eliminate some or all of your tax liability.  You can obtain this professional help by completing the short form below.  When you complete this form, there is no obligation to you and the review is 100% confidential.

Determining how the bankruptcy laws apply to different types of tax is a difficult subject to analyze.  Therefore, please complete the form below to get the assistance you need today.