When considering debt-relief with a bankruptcy filing there are a number of obligations that cannot be wiped out. There are generally 5 categories that I will discuss in detail within this article. Some debts cannot be discharged because of specific statutes or prohibitions in the law, and will not be dis-chargeable just because of inexperience or plain sloppiness or timing of filing.
1. Debt-Relief Cannot Occur After Your Bankruptcy Filing
Debts are created by the event, not when you get the bill. If you buy a car with a loan, the debt is created at that moment, not when you get your first bill for payment. If you’re considering or must have substantial medical treatment that is uninsured, the resulting debt will not be covered by bankruptcy if you file before the treatment. If possible, delay the bankruptcy filing until after the medical treatment, and then include the debt in the bankruptcy filing.
2. Debts That Aren’t Listed in Your Bankruptcy Filing
Many times you may forget to list a creditor in your bankruptcy filing. Occasionally you might not even know you have a debt because the creditor stopped sending you a bill. Prior to filing bankruptcy be sure to go to all three credit unions to get a list of all the creditors you may own. Even if you are not sure of the amount you may owe list the debt and the creditors address. If this amount is wrong it puts the creditor in the position to have to file a proof of claim to establish the amount that actually owed. The point is you have listed the debt to discharge.
For example in Chapter 13 cases, debts are dischargeable unless you amend your filing to include those creditors who you may have forgotten on the original application. You have 90 days from the 341 meeting to make the amendment. Creditors then have 60 days to file a proof of claim.
In Chapter 7 cases, the unlisted debt is not technically discharged. In over 95% of non-asset Chapter 7 cases, the creditor would not have received any money even when the debt was listed. In this case, most courts, but not all, allow the debt to be discharged.
Comparison of Non-Dis-chargeable Debt: Chapter 7 Versus Chapter 13
- Marital and domestic support obligations are not dischargeable under Chapter 7 and dischargeable if paid under Chapter 13 plan.
- Marital property divisions are not dischargeable in Chapter 7 and are dischargeable under Chapter 13 plans.
- Student loans are not dischargeable under either Chapter 7 or 13 unless undue hardship can be proved.
- Claims made for investment or theft are not dischargeable in either Chapter 7 or 13.
- Criminal fines and restitution are not dischargeable under either chapter.
- Non-criminal restitution is dischargeable under Chapter 7 and Chapter 13 unless there was willful conduct causing personal injury, fraud, or embezzlement.
- Personal injury claims from drunk driving are not dischargeable in Chapter 7 nor dischargeable in Chapter 13 and must be fully paid in Chapter 13.
- Motor vehicle fines and tickets are not dischargeable under Chapter 7 but are dischargeable if a minor infraction. They are not dischargeable if the conduct was criminal.
- Claims for willful or malicious contacts are not dischargeable in Chapter 7 but may be under Chapter 13 unless assessed by the court.
- Pension loans are not dischargeable under Chapter 7 but are dischargeable in Chapter 13, but the debt amount can still be detected from the pension account.
- Welfare and unemployment benefits that were wrongly received are not dischargeable under Chapter 7 or 13.
- Debts resulting from fraud are not dischargeable in either Chapter 7 or 13. This would include debts created immediately before filing, like credit card charges and other debts where the debtor had no intension to pay.
- Real estate and personal property taxes that were incurred less than one year before bankruptcy are not dischargeable in Chapter 7, and in Chapter 13 plans, must be fully paid.
- Trust fund taxes are not dischargeable. Trust fund taxes are those taxes that were withheld from employee paychecks there were supposed to be paid. So if a business is shaky be sure to pay these employment taxes before anything else, because they will never go away.
- Loans that were made to pay non-dischargeable taxes are not dischargeable in Chapter 7. They are dischargeable in Chapter 13 unless borrowed fraudulently. For example, if you used a credit card to pay taxes while planning bankruptcy.
3. Reaffirmation of Debts in Your Bankruptcy
Other than taxes, which we will look at in a separate chapter, the only other debt that is not dischargeable are those that are reaffirmed. Reaffirmation is the process in which you agree to pay all or part of the debt. It gives all the rights back to the creditor. Why would one reaffirm?
The major reason is that a debtor wants to keep the debt is he want to keep the collateral that secures the debt.
4. Your Bankruptcy Petition Can be Thrown Out – Revoked
Speaking of discharges, your bankruptcy petition can be revoked altogether. If that happens your filing is thrown out and you will not receive any relief from your debts. There are several reasons a bankruptcy may be denied:
Grounds For Revocation of Your Chapter 7 Bankruptcy Filing
- Purposely fail to list an asset on your bankruptcy schedules.
- Intentionally give false information in your bankruptcy schedules.
- Lie or mislead trustee at the 341 meeting.
- Fraudulently transfer property within one year before bankruptcy.
- Fail to complete a financial management course after bankruptcy (required under BARF).
- Refuse to cooperate with the trustee.
- Disobey an order of the bankruptcy court.
- Fail to file all federal tax returns that should be filed with the court.
- Aggressively convert non-exempt assets into exempt assets.
- Previously received a Chapter 7 discharge in a case filed within eight years of the current filing, or within six years if a Chapter 13 case
- Failure to report or surrender property to the bankruptcy estate.
Grounds For Revocation of Your Chapter 13 Bankruptcy Filing
- Failure to complete a financial management course while your bankruptcy was pending.
- Failure to file all your federal tax returns that should be filed with the court.
- Have not kept current with your post-petition support payments.
- Received a discharge in a prior Chapter 7, 11, or 12 cases within four years of your present filing or in a previous chapter 13 case filed within two years.
- Failure to cooperate with an audit after the discharge or you don’t satisfactorily explain mistakes in your paperwork.
5. How Income Taxes Are Handled in Your Bankruptcy
Income taxes fall into a special category, so we need to look at them in detail. Taxes due within three years are also priority items, which means they get paid before other items. Income taxes can be wiped out in bankruptcy under certain specific circumstances. To file bankruptcy, you will need to prepare the last four years’ income tax returns and have them available for the bankruptcy trustee. As a general rule, taxes that are less than three years old, you’re going to have to pay through a Chapter 13 plan or make arrangements with the IRS for payment.
Taxes that have not been paid that are more than three years old and were assessed more than 240 days prior to the filing date are dischargeable. Simple right? As with all things IRS there are a number of possible caveats:
- First, the taxes must be true, and you can’t have engaged in tax evasion. Your only excepted failure is not paying in a timely manner.
- Be careful of timing. The start of the 3-year period normally is April 15 of the following year of the period, but if you file an extension, it starts after the extension expires.
There are three possible reasons that the 3-year period can be extended:
- If the IRS was prevented from collecting taxes because of a due process hearing, that time does not count, and an additional 90 days is added.
- Similar to the above any amount of time that a taxpayer assistance order was in effect, also does not count, and an additional 90 days is added.
- If you had a prior bankruptcy, the time the case is open does not count and 90 days are added to the three years.
If you never filed a tax return you will NOT be able to avoid paying them. There is no statute of limitations on non-filed returns.
How The Timing of Tax Payments Affects Your Bankruptcy
There are several timing decisions when dealing with tax payments that can affect the amount of taxes you may ultimately owe. When the IRS files a notice of tax lien with your county before you file bankruptcy it makes it even more difficult to discharge taxes. The lien gives the IRS a prior claim on all your assets, even retirement plans. So, they still encumber pre-petition assets.
When you file a Chapter 7, you may have the trustee use liquidate assets to pay your current taxes, but you must make an election to do so shortly after filing bankruptcy.
In Chapter 13, is critically important that you factor into your repayment plan the taxes the amount you do owe and that you expect to owe. If you don’t fulfill your plan agreement the entire bankruptcy can be revoked or denied.
Before filing bankruptcy, sometimes you want to consider paying non-dischargeable taxes by selling nonexempt property and paying off the tax debt. Always consult your bankruptcy attorney before taking this step.
State Income Taxes
Generally, the same rules apply to state income taxes that are covered by the IRS. If any of your federal tax liabilities change, be sure to file an amended state tax return also. You want to take advantage of any federal discharges that might apply to the state also. In Nevada, since there is no state income tax, this is one less thing to worry about.
Other Types of Taxes
Generally, non-income taxes are dis-chargeable in Chapter 7 or Chapter 13. The event that causes the tax liability must be more than three years before the filing date.
Property taxes are assessed against the property and land and only become an issue if you want to keep the real estate. You need to include provisions to pay these property taxes in any Chapter 13 plan.
Personal property taxes are not dis-chargeable if they are assessed against the owner and are less than one-year-old.
Please call our office at (775) 786-7600 or (775) 690-9120 and set up an appointment for a free and confidential consultation with me to discuss your financial situation. We will investigate all of your options and alternatives, even those that don’t require you to file bankruptcy at all. Feel free to visit our website at www.harrislawreno.com to learn more about our bankruptcy practice here in Reno.