Posts

8 Ways to Stay Out of Bankruptcy

I am a bankruptcy attorney. From my point of view here are the things that most often push people into bankruptcy._1130814

1)  Never ever co-sign a loan for a friend. Some of the most tragic bankruptcies occur when the client has otherwise sterling credit but his “friend” doesn’t pay.

2)  Avoid ruinous debts with ridiculous interest rates. These include payday loans, used car loans, even mortgages with 30, 90 or even 200% annual interest, or more. They are roads to disaster.

3)  Always, pay more than the minimum on credit card debt. If you can only afford the minimum payment than you are carrying too much debt. The interest will eat you up.

4)  Carry health insurance.

5)  Student loans are not free money.  Be very careful with student loans. They are non-dischargeable debts in a bankruptcy.

6)  What follows is very hard advice.  People hate to hear it, but, if your economic circumstances change adjust. If through divorce or unemployment you can’t afford your lifestyle — downsize.

7)  Contact your mortgage company and apply for a home loan modification. Then, think twice before signing it. You are often pushing costs to the end of the loan where you will eventually have to pay them back.  But on the other hand you may be lowering your interest rate. So consider the terms and your alternatives, like selling and moving somewhere cheaper.

8)  Don’t refinance your home or take money out of a 401K to pay unsecured debts.

Are my income taxes dischargeable in a bankruptcy?

Income tax issues in bankruptcy are a can of worms.  In only limited cases are taxes or tax penalties dischargeable in bankruptcy.  The primary issue is timing and a separate analysis must be done for eachCanWorms- year’s taxes, interest and penalties.

In bankruptcy each tax debt or claim will fall into one or more of the following categories:

1)  Allowed secured claims include taxes, interest and penalties for which the IRS has filed a lien.  To the extent that the lien is not under-secured, they are probably not dischargeable.  However, in a Chapter 7 the penalties for late payment may be.

2)  Unsecured priority claims are usually paid in full in a Chapter 13, including interest but not penalties.  But the interest does not continue to accrue once the Chapter 13 is filed.  They are not dischargeable in a Chapter 7.

3)  Unsecured claims that are dischargeable in a Chapter 13 or a Chapter 7.  To qualify the tax return must have been filed on time, or in some cases if late must have been filed more than 2 years before filing bankruptcy.  It must have been more than 3 years since the tax return was due before filing the bankruptcy.  Also, the IRS must have notified the debtor of the taxes due (the assessment date) more than 240 days before filing.

Taxes are never dischageable if a return has not been filed, if a fraudulent return was filed or if the debtor willfully attempted to evade paying the tax.

The analysis of each year’s taxes begins with requesting a transcript from the IRS.  The debtor should file a Form 4506-T  Request for Transcript with the IRS (available on their website http://www.irs.gov/Forms-&-Pubs) for each year that may be dischargeable.  The transcript will show if the return was filed on time, or if it was late when it was filed, if the return was due within 3 years of filing bankruptcy and if the taxes were assessed within 240 days of filing bankruptcy.  Short take is that the tax return has to have been filed and the taxes have to be old.  Tax debts are the most frequently nondischargeable debts in bankruptcy.