Recently on our bankruptcy forum a user asked, “I started a restaurant five years ago with a partner. Unfortunately, with competition and growing expenses we’re having trouble paying our bills. I need more information about filing Chapter 11 bankruptcy. I would love to keep the restaurant open, if possible.”
A bankruptcy judge has fined Bank of America for continuing to pursue collection efforts against a couple who used bankruptcy to discharge their mortgages.
When you plan to file for bankruptcy to obtain a discharge of your creditors, one of your responsibilities is to list all of your income, debt, and property on the appropriate bankruptcy forms or schedules. If you fail to properly disclose your financial position as a part of your bankruptcy filing, the bankruptcy court may throw out your bankruptcy case altogether if it believes you were intentionally trying to mislead the court as to your financial position by hiding assets or by trying to give one of your creditors preferential treatment.
But what happens if you accidentally leave one of your creditors off of your bankruptcy petition? The good news is that you can generally amend your bankruptcy petition to add the creditor you missed. How long do you have to make amendments? You can generally amend your bankruptcy petition, as long as the bankruptcy is still pending, by simply submitting an updated version of the form where the creditor was omitted. The specific form may vary depending on the bankruptcy court where you are filing bankruptcy.
In fact, if you are filing a Chapter 7 bankruptcy for the discharge of your debt, then depending on the jurisdiction where you are filing the bankruptcy, the bankruptcy court may still simply discharge an unlisted debt that would have otherwise been discharged in the bankruptcy. In such cases, the bankruptcy court simply realizes the discharge of an unlisted creditor is the result that would have occurred if you had listed the creditor in the first place. Therefore, the bankruptcy court simply moves forward as though you had listed the creditor.
However, some bankruptcy courts may still force you to formally amend your bankruptcy petition to add the creditor you missed. And in Chapter 7 and Chapter 13 bankruptcy cases where you have assets that are being distributed to creditors as a part of the bankruptcy, failing to list a creditor may create a complicated situation if your assets have been distributed improperly. Therefore, it is best in all cases for you to list all of your creditors thoroughly from the start to avoid having to amend your bankruptcy filing.
Identifying all of your creditors to list them on the bankruptcy schedules can appear to be a complicated matter. You cannot simply list only the creditors that are calling you or sending you letters, as some creditors may still have a legal claim against you for a debt even if they are not currently contacting you.
However, it is generally sufficient and reasonable for you to list all of your creditors that appear on your credit report and consider that a complete list of your creditors, as creditors will usually report a delinquent liability to one or more of the three credit bureaus (i.e., Experian, TransUnion, and Equifax). You can see through your credit reports as well which creditors have written off or discharged the liability you owe them, which means you are no longer legally obligated to pay them the money you owed or to list them in your bankruptcy petition. When a creditor chooses to write off a debt will vary depending on whether the creditor believes it can collect the money you owe them and the statute of limitations for collecting the debt, which varies by state.
You should review the reports from all three credit bureaus, as each bureau may have different information. You are allowed to get one credit report from each of the credit bureaus for free once every 12 months.
Filing for bankruptcy and completing a list of all your creditors as a part of that filing can be a complicated matter. Therefore, it is generally a good idea to consult a trained bankruptcy attorney. A bankruptcy attorney can help be sure you complete the necessary bankruptcy filings correctly the first time, giving you peace of mind that your case is being handled correctly and taking the stress off of your shoulders. Likewise, a bankruptcy attorney can advise you on how to amend your bankruptcy petition.
- Discharge of Debt in Bankruptcy? (betterbankruptcy.com)
- Bankruptcy and the Stress Experienced After Filing (betterbankruptcy.com)
- Collections, Charged Off Debt, and Bankruptcy (betterbankruptcy.com)
- Is a Creditor Continuing to Contact You After Bankruptcy? (betterbankruptcy.com)
If you are considering filing bankruptcy and are involved in a lawsuit as either the plaintiff or the defendant, then it is important that you understand how the bankruptcy will impact the lawsuit.
First, let us consider the case where you are the plaintiff in a lawsuit where you expect to receive a cash settlement. When you declare bankruptcy, you are required to list all of your real and personal property. Real property refers to real estate, whereas personal property refers to virtually everything else you own (e.g., cash, checking and savings account balances, household furnishings, clothing, jewelry, firearms, stocks, automobiles, boats, and any other property with value).
A settlement owed to you related to a lawsuit is definitely considered an asset if you have already won the lawsuit and the amount owed to you has been set by the court. In this case, where you have won the lawsuit and are expected to receive a settlement, then even if you have not yet received the money, it is considered an asset for the purpose of a bankruptcy and you must list it in the appropriate bankruptcy schedule.
In addition, even if you are still in the midst of a lawsuit and only believe you will win the suit and thus receive a cash payment as a result, you should declare such a possible payment and list it as an asset in the bankruptcy schedules. Even though you do not yet legally posses an asset, the simple possibility that you may receive a settlement is sufficient from the bankruptcy perspective for it to be considered an asset. Therefore, if you want to protect your right to the settlement in the future, you need to take the conservative approach of listing the potential asset and seeking to have it exempted from the bankruptcy. Otherwise, the bankruptcy trustee may be able to obtain a default claim to the asset because you failed to declare it in the bankruptcy as directed by law.
Alternatively, what happens if you are being sued for a financial settlement and you declare bankruptcy? Can a bankruptcy be used to discharge any liability ruled against you? Regardless of whether you are seeking to file a Chapter 7 bankruptcy to liquidate your assets or a Chapter 13 bankruptcy to reorganize your debts, the effect the bankruptcy has on the lawsuit and whether you can obtain a discharge depends largely on the reason for the lawsuit.
Bankruptcy can give you a discharge of a lawsuit seeking a financial settlement if the lawsuit originates related to one or more of the following sources:
- Unsecured loan or credit card debt
- Medical expenses
- Bad business debt
- Debt above the amount received when a home or automobile is repossessed or related to the lease of a home or automobile
- Damages related to automobile or other accidents
- Tax-related penalties over three years old
- Taxes that are not considered priority claims
Alternatively, if the lawsuit against you is for one of the following reasons, you likely cannot receive a discharge in a bankruptcy:
- Damages related to intentional injuries you caused to others or because you were under the influence of alcohol or other drugs
- Money you obtained through fraud, embezzlement, or other crimes
- Fines charged to you as part of the punishment for a crime
- Support you owe relating to a child or family
- Student loans
- Any debt that has been upheld in a previous bankruptcy
- Tax-related penalties less than three years old
- Taxes that are considered priority claims
- Any other money you owe that you neglect to list and include in your bankruptcy
Remember that the information about receiving a discharge through a bankruptcy or declaring a possible lawsuit settlement in your favor is general in nature and may be subject to change. You should speak with a bankruptcy attorney to confirm how declaring bankruptcy will affect you given the specific circumstances of your lawsuit.
- Debt Settlement, Collection Agencies, and Your P&L Before Bankruptcy (betterbankruptcy.com)
- Federal income tax significant events, Part 9 – Bankruptcy (taxlawhome.com)
- Filing Financial Bankruptcy: Choice, Right, and New Beginning (betterbankruptcy.com)
- Should You File Bankruptcy if You are Collection Proof? (betterbankruptcy.com)
- Why Bother to File Bankruptcy? (betterbankruptcy.com)
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.