We are not your typical Bankruptcy Law firm. We only use Bankruptcy as an option to address tax matters. If you have general, non-tax, bankruptcy needs, we recommend that you call a local Consumer Bankruptcy Attorney.
1) Trust Fund Taxes. Tax liability consisting of trust funds are never dischargeable. The most common trust fund taxes are payroll tax (trust fund portion) and sales tax. Although not generally dischargeable, trust fund taxes may, however, be restructured in a Chapter 11 or Chapter 13 Bankruptcy. Whether the tax comprises "trust funds" and the amount may be challenged and non-trust fund amounts possibly discharged.
2) Three Year Rule. To be dischargeable, the tax return for the tax liability in question must have been originally due at least three years before you filed for bankruptcy.
3) Two Year Rule. Tax return for the tax debt in question must have been filed at least two years before filing for bankruptcy.
4) "240-day rule." The IRS must have assessed the tax at least 240 days before the filing of the bankruptcy petition. Note that this rule may be impacted if the IRS collection activity is tolled/extended because of an offer in compromise, appeal, or a previous bankruptcy filing.)
5) Fraud or Willful Evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, then the taxes are not dischargeable in Bankruptcy. The government has established a very broad range of factors is considers "willful attempts" to evade paying taxes and the courts have generally upheld the government's factors.
6) McCoy Rule. In the recent, highly publicized McCoy case, the Bankruptcy Court determined that even if all of the aforementioned factors are satisfied, if the tax return is not filed by the original due day (i.e. April 15th) or extended due date under a valid extension (i.e. October 15th), then the tax liabilities are not dischargeable. The Fifth Circuit Court of Appeals has upheld the McCoy ruling but certiorari was not granted by the U.S. Supreme Court. This ruling is likely to be further challenged, but for now, McCoy is the law.
We are often contacted by individuals and businesses who: 1) are not sure whether their tax problems can be solved through Bankruptcy; 2) thought their taxes had been discharged in Bankruptcy but were disappointed to learn, after the fact, that the tax liabilities still remain; or 3) have financial problems other than just taxes.
Many of these individuals and businesses are unsure about the Bankruptcy process and unsure which Chapter is best for them, if any. Between Chapters 7, 11,13, or a combination of these, there is usually an opportunity to obtain immediate relief for a debtor/taxpayer, depending on whether other factors suggest that Bankruptcy is the debtor's best option.
This is a very common question, as there is a lot of confusion surrounding this subject. Too often, debtors may receive a discharge by the Bankruptcy Court only to learn later that their tax liability was not included (excepted) from the Discharge Order. This is extremely unfortunate in cases where the tax liability was the primary reason for filing the Bankruptcy. There are a couple of general rules to consider when evaluating whether taxes are dischargeable in Bankruptcy.
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Chapter 11. Chapter 11 is primarily used by business debtors or individuals with substantial debts/assets and income. Chapter 11 is a form of reorganization which is designed to allow debtors to continue to function while it follows a debt repayment plan. This repayment plan is negotiated and approved by a committee made up up the debtor and creditors. Although there are certain statutory limitations applicable to tax debts, this form of Bankruptcy can be extremely beneficial to debtors (and taxpayers) operating a business which have the potential to repay their debts. An important factor to consider regarding Chapter 11 Bankruptcy is that the Bankruptcy Court becomes involved in virtually all of the debtor's operating activities. While this may seem somewhat intrusive, the benefits are often worth it. There is also a heavy degree of tax and accounting reporting associated with a Chapter 11 Bankruptcy. This makes it more expensive than a Chapter 7 or Chapter 11 Bankruptcy, but again, the benefits are often worth the extra expense and extra reporting.
Chapter 13. Chapter 13 is considered a rehabilitation or reorganization for individual debtors with a regular source of income. This Chapter is designed to allow debtors, while keeping most assets, to enter into a plan to repay all or a part of their debts. Most debts are not discharged by a Chapter 13, only the payment terms are restructured. Chapter 13 is sometimes referred to as "Wage Earner Bankruptcy". One of the strongest aspects of Chapter 13 Bankruptcy is that it permits debtors to restructure their monthly payment amounts so that the debtor is not forced to pay available penny to prior debt. The idea is to get the creditor paid, but allow the debtor to keep enough money to meet essential daily expenses. Chapter 13 can also be used to re-structure tax debt. Certain local taxing authorities offer virtually no payment plan alternatives yet have extensive garnishment/levy power. These authorities frequently garnish taxpayers to the point (we have even seen 100% garnishments) that the taxpayer is unable to satisfy even basic living expenses. Immediate relief and reasonable payment terms (often 60 months) can be quickly obtained by filing a Chapter 13 Bankruptcy.
If the Bankruptcy option is selected, and tax liabilities (whether disputed or not) or other disputed liabilities exist, we generally file an Adversarial Proceeding in the Court seeking to obtain a determination entered by the Court as to the dischargeability of the tax liability (to avoid surprises down the road) and to challenge liabilities that are disputed (incuding taxes) in order to obtain final resolution on claims that are not (or may not be) dischargeable in the Bankruptcy.
An Adversarial Proceeding is simply a lawsuit filed within a Bankruptcy Estate. Our Bankruptcy Team generally handles the administrative matters in a Bankruptcy Case, but our Litigation Team of Trial Attorneys generally handle Adversarial Proceedings, as it is an actual suit tried before the Court. This 2-pronged approach gives us a dimension that affords our clients protection under the Bankruptcy Court, while providing an avenue in which the merits of claim can also be presented to the Court.
United States bankruptcy courts are courts created under Article I of the United States Constitution. They function as units of the district courts and have subject-matter jurisdictionover bankruptcy cases. The federal district courts have original and exclusive jurisdiction over all cases arising under the bankruptcy code, (see 28 U.S.C. § 1334(a)), and bankruptcy cases cannot be filed in state court. Each of the 94 federal judicial districts handles bankruptcy matters.
The current system of bankruptcy courts was created by United States Congress in 1978, effective April 1, 1984.The bankruptcy judges in each judicial district in regular active service constitute a "unit" of the applicable United States district court (see 28 U.S.C. § 151). The bankruptcy judge is appointed for a term of 14 years by the United States court of appeals for the circuit in which the applicable district is located (see 28 U.S.C. § 152).Technically, the United States district courts have subject matter jurisdiction over bankruptcy matters (see 28 U.S.C. § 1334(a)). However, each such district court may, by order, "refer" bankruptcy matters to the bankruptcy court (see 28 U.S.C. § 157(a)). As a practical matter, most district courts have a standing "reference" order to that effect, so that all bankruptcy cases in that district are handled, at least initially, by the bankruptcy court. In unusual circumstances, a district court may in a particular case “withdraw the reference” (i.e., take the case or a particular proceeding within the case away from the bankruptcy court and decide the matter itself) under 28 U.S.C. § 157(d).
The overwhelming majority of all proceedings in bankruptcy are held before a United States bankruptcy judge, whose decisions are subject to appeals to the district court. In some judicial circuits, appeals may be taken to a Bankruptcy Appellate Panel (BAP).The Federal Rules of Bankruptcy Procedure (FRBP) govern procedure in the U.S. bankruptcy courts.Decisions of the Bankruptcy Courts are not collected and published in an official reporter produced by the government. Instead, the de facto official source for opinions of the Bankruptcy Courts is West's Bankruptcy Reporter,
"Too often, the only way to obtain any relief from creditors and taxing authorities is to seek protection from the Federal Bankruptcy Court."
Jimmy McGee, Attorney
Although there are a number of types (aka "Chapters") of Bankruptcy, the three most common types are Chapters 7, 11, and 13. These bankruptcy types vary based upon a several factors, including: the size of the debts, whether the debtor is a business or individual, whether the debtor wants to liquidate assets to satisfy debts or restructure a payment plan, and the asset/liability composition of the debtor.
Chapter 7. Chapter 7 is a basic liquidation of assets. This type of bankruptcy is available to both businesses and individuals. It is generally known as a "straight" bankruptcy and is usually the simplest and quickest form of Bankruptcy. Under a Chapter 7 Bankruptcy, the debtor is generally allowed to keep certain "essential" assets such as a home, car, and household fixtures. These are referred to as "exempt" assets. (Beware...there are strict rules regarding whether certain assets are exempt.) All other (non-exempt) assets are liquidated (i.e. "sold") and the proceeds are used to pay creditors. Liabilities to creditors remaining after liquidation proceeds have been distributed are then "discharged" by the Bankruptcy Court and the creditors can no longer attempt to collect on the balances.
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