July 26

Can I Get Rid of Income Taxes in Bankruptcy?

It is possible to discharge income taxes in bankruptcy. As with most things in bankruptcy, the bankruptcy code is where to find the answer.

 

Note

The dischargeability of income taxes is covered in two interconnected portions of the bankruptcy code. 11 U.S.C. §523(a)(1) and 11 U.S.C. §507(a)(8)(A) combine to create the following rules for discharging income taxes in bankruptcy:

1. The income taxes must have become due at least 3 years prior to the bankruptcy filing. Federal income taxes are due in April (usually April 15th). Here in California, the Franchise Tax Board has the same due date. Don’t forget about extensions, however. For federal taxes, you must apply for the extension and the due date can be extended to October. For the Franchise Tax Board, the taxpayer does not need to apply as the extension to October is automatic.

2. The debtor in the bankruptcy case must have actually filed the tax return(s) at least two years prior to the bankruptcy filing.

3. At least 240 days must have passed since the taxes were assessed. This can be determined by ordering a tax account transcript for the tax year(s) in question.

If the taxes meet those three requirements, then they should be dischargeable in a bankruptcy case. The bankruptcy code also contains a provision that any taxes resulting from a fraudulently filed tax return or an attempt to evade taxation will remain non-dischargeable even if they otherwise meet the requirements above.

There is a rare minority view in the 5th circuit that a late filed return by a bankruptcy Debtor did not qualify as a “return” as it was not timely filed (essentially making all late filed taxes permanently non-dischargeable). Thankfully, this view of income tax dischargeability is isolated, and doesn’t seem to be one that other Courts are picking up. To date, no 9th Circuit (here in California we’re in the 9th Circuit) bankruptcy Court has agreed with this view.

To find out if specific taxes may be eligible for discharge in a bankruptcy case, speak with a qualified bankruptcy attorney.

July 19

Are My Retirement Accounts Exempt in Bankruptcy?

Wondering about whether retirement accounts are safe in bankruptcy is one of the most common concerns of potential bankruptcy filers.

Retirement

As with all questions about whether something is “safe” in bankruptcy, we should first note the distinction between Chapter 7 and Chapter 13 bankruptcy. In Chapter 13, there is no liquidation power for the bankruptcy trustee so there is no risk of a retirement account being liquidated to pay your creditors.

In chapter 7 bankruptcy, although some property could be liquidated, it’s pretty rare; and retirement accounts have pretty strong protections so liquidation of a retirement account is exceptionally rare.

In chapter 7 bankruptcy, the ability of the debtor (person filing bankruptcy) to claim property exempt (keep it safe from creditors) is based upon exemption laws. The bankruptcy code contains a set of exemption laws, but the code says that each state may elect to create their own exemption laws. The states can also choose whether to “opt out” of the federal exemptions (meaning, residents of a state that has “opted out” are not eligible to use the federal exemption laws).

With most property, if a state has opted out of the federal exemptions, then the Debtor’s ability to claim a particular item as exempt depend upon the individual state’s exemption laws. Retirement accounts, however, get special treatment. As part of a major change to the bankruptcy code in 2005, Congress created a nationwide exemption for retirement accounts that every Debtor is eligible for even if their state has opted out of the federal exemptions. That special retirement exemption is found in 11 USC 522(b), and it allows Debtors to claim exempt retirement accounts that are, “exempt from taxation under §401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” This broad language covers virtually all tax exempt retirement plans. IRAs are capped at a maximum exemption of $1,000,000.00 in aggregate value.

So, the bankruptcy code explicitly makes virtually all retirement accounts exempt up to amounts that almost any bankruptcy Debtor would not exceed.

There was a wrinkle recently, however, when a bankruptcy Court in the sixth circuit ruled that some IRAs may have been unintentionally converted from tax exempt status based on the language in some IRA customer agreements. This case prompted some bankruptcy Trustees to start examining IRA client agreements to determine if they could be defeated and then declared not exempt. Thankfully, that decision was recently reversed on appeal.

July 12

If I file for bankruptcy, will I lose my home? What about my car?

I live in Sherman Oaks and I am thinking of filing for bankruptcy. If I file for bankruptcy, Can I keep my home and car? Will I lose my personal belongings or cash in my bank accounts?

The simple answer to this question is: In about 94% of Chapter 7 cases, you will not have anything taken from you. So, the odds are strongly in your favor that you can file bankruptcy and not lose anything.

There are two ways people typically file for bankruptcy – under either Chapter 7 or Chapter 13. In a Chapter 13 case, an experienced bankruptcy attorney would draft a plan to restructure your debt and you would make payments on the debt in your chapter 13 bankruptcy case. In a Chapter 13 case, nothing is ever taken from you and sold for creditors (there is no power to liquidate), so we’ll assume you are asking about a Chapter 7 case.

In a Chapter 7 case, you have to list all property you own or have an interest in. You are then entitled to claim exemptions on your property. The exemptions for people who live in Sherman Oaks are usually going to be based on California law and would be found in either California Code of Civil Procedure Section 703 or California Code of Civil Procedure Section 704. In some circumstances, if you have not been a resident of California for the 2 years preceding your case, then you may be required to use other exemption laws.

The exemptions under California law are pretty generous and you would only be at risk of losing something if the value of the equity in your property exceeded the amount you were entitled to exempt.

So, for example, if it’s a home you are worried about and you were using the exemption set found in California Code of Civil Procedure Section 704.730 (or Section 704.950), then you would be entitled to claim a large homestead exemption. Let’s assume you were single, had no dependents and were not over age 65 (or meet any other rare qualifications for a higher homestead). You would then be allowed to claim up to $75,000.00 of equity exempt in your home. So, if your home was worth $550,000.00 and your mortgages totaled $500,000.00 then you could claim the $75,000.00 homestead exemption and be fine (because your exemption claim exceeds the $50,000.00 of equity in the property).

The inner workings of “being fine” are a bit more complex than described above, but we can explore that in another post on bankruptcy trustees, their role and how they operate.

Similarly, if you had a vehicle and the value of your exemptions exceeded the value of its equity, it would be safe. For example, if you were filing bankruptcy and using the California Code of Civil Procedure Section 703 set of exemptions (different than the California Code of Civil Procedure Section 704 set discussed above. You have to choose one set, you cannot mix and match) and your vehicle was worth $15,000.00 and had no loan on it, then you would have $15,000.00 of equity. Under California Code of Civil Procedure Section 703.401(b)(2), bankruptcy filers are entitled to a motor vehicle exemption of $5,100.00. Not enough to cover the whole car, but not a problem. Bankruptcy filers who have “extra equity” in virtually any personal property item can always fall back on California Code of Civil Procedure Section 703.140(b)(5) aka “the Wildcard” which allots up to $26,925.00 towards almost anything you want to use it on. So, in this example, you could claim the car exempt by using the motor vehicle exemption of $5,100.00 and then additionally claiming $9,900.00 of the wildcard towards the car (to total $15,000.00). You would then still have the remaining $17,025.00 of wildcard available for further use.

As you can see, California’s bankruptcy exemptions are very generous and almost all filers do not have assets that exceed the exemption amounts.

If you’re thinking about bankruptcy and have specific questions about whether your home, cars or other property would be safe please feel free to contact us and one of our experienced bankruptcy attorneys can answer your questions.

July 3

Can Bankruptcy Stop Foreclosure?

I received the following question today:

I live in Woodland Hills and I am behind on my mortgage. I received a notice of sale that says my house will be sold at auction. Needless to say, I am very concerned about this. I have heard that I can use bankruptcy to save my home. Is that true?