The Golden Rules to Discharge Taxes:
If you choose to file a Chapter 7 bankruptcy, your tax debt could be discharged if you meet the following tests:
Many of our recent bankruptcy clients report large amounts of business debt. This may be small business loans, credit cards run up to support a small business, or personal guarantees. Often the business is gone at this point and we are looking to file an individual bankruptcy. Filing a bankruptcy for a dissolved business is often an unnecessary and risky expense.
Sometimes our debtor client is married, and their spouse remains unaffected by the bankruptcy. Their marriage alone often provides the basis to protect their personal or real property by using a special exemption called Tenancy by the Entireties. In Florida, our homestead laws are quite broad and serve to protect the home. Most IRAs, SEP IRAs, 401ks and other retirement assets are fully protected as well. If the amount of business debt exceeds the consumer household related debt, our clients do not even have to comply with the rather stringent Means Test imposed by Congress in the bankruptcy reform act passed a few years back.
Business creditors are also often some of the most aggressive. They figure if you once made money, you will again one day. So they sue and obtain a judgment. But if you file bankruptcy at a low point in your life, you truly can start over. You can file bankruptcy whether or not the creditor has already obtained a judgment. It’s discharged all the same.
This can be a sticky wicket. I’ve never actually used that word in a sentence. 🙂 Normally you can buy a car before filing bankruptcy. In fact, in some cases it can be a good idea (note: as a bankruptcy attorney I am not supposed to tell our clients to buy cars before filing). But you should know that if you do pull the trigger to buy a car before filing you often can get a better interest rate or other financing terms than if you are actually in a bankruptcy. You still have to pay to keep it of course. But you’ll have a better idea of what your budget will be when you actually file for bankruptcy. It’s a bad idea to have too high of a monthly payment also, so keep it within a sustainable amount. Getting a replacement vehicle before you file can also be a good idea because then any future repairs will be covered by a warranty. Once you are in bankruptcy, you likely won’t have extra money sitting around to fix a broken transmission, and would have to file motions to replace the car or obtain a short term stay of your plan payments if a Chapter 13.
What about selling your car before filing? Also a sticky wicket. That’s twice now, I’m on a roll. If you are selling for fair market value to a third party, all is good. If you are giving your friend or family member the deal of a century that is an incredibly bad idea however. The trustee can go get the car back and sell it at its real value for the benefit of your creditors. It is best to keep a record of the transaction and deposit the funds in your bank account so the bankruptcy Trustee can see that the money actually was paid and where the money went.
So, what about trading in a vehicle? Well, that also is not as black and white as you might think. I’m done with the wicket thing. If you are trading in a vehicle with a good amount of equity (maybe even free and clear) and you soon afterwards file a Chapter 7, the Trustee might not be too happy about it. You see, to them, you’ve now liened up an asset that may have been over your exemptions. They would have wanted to sell that free and clear vehicle to bring money into the bankruptcy estate. Particularly if you don’t have any exemptions left to cover the equity in the vehicle. But if the vehicle had a large lien on it and you’ve merely switched to another vehicle they likely won’t care. If you are in a Chapter 13, it likely won’t make a bit of difference. But be careful if you are filing Chapter 7 and make sure to obtain the advice of a good bankruptcy attorney before trading in your vehicle if it has equity.
One of the common questions we get is whether or not someone filing bankruptcy can keep their car. The answer is Yes, but you do have to pay to keep it. How you do that depends upon how much equity is in the car, whether you own or lease, whether it is jointly owned, and whether you are current on the payments. The information below applies to Florida exemptions, the laws may be different in other states and you may still be governed by another state’s exemptions if you’ve recently moved to Florida.
Chapter 13: A Chapter 13 can be used to catch up on missed payments. It also can be used to value an underwater vehicle that you have owned for more then 910 days to what it is worth now. I’m sure you know this, but just in case, the phrase “underwater” means you owe more than it is worth. If you are current on payments, and the vehicle is worth more or equal to what you owe you would just “pay direct” and simply inform the court that you are continuing to make monthly payments. There is no need to reaffirm the vehicle, as the original credit agreement continues to exist throughout the bankruptcy.
Chapter 7: You can also keep a vehicle in a Chapter 7. In Florida, you are able to keep certain exempt property which includes $1,000 personal property, $1,000 vehicle equity, and a special exemption of $4,000 if you rent, or you do not own a home that you are keeping or otherwise receiving the benefit of a homestead. So if you are able to claim all three exemptions, for a single debtor, that would mean you can keep $6,000 worth of vehicle or belongings. Anything more than $6,000 you can make arrangements with the bankruptcy trustee to pay to keep. So for example, if your vehicle is worth $10,000, but you still owe $8,000, that means you have $2,000 in equity. If you also had $1,500 in personal belongings and $1,000 in the bank, you would have a total of $4,500 which would fall with the allotted $6,000 exemption. You could keep the vehicle and just continue to make the payments. In order to do so, the creditor will require you to sign a reaffirmation agreement which is essentially a new agreement to pay for the vehicle. The terms are generally the same although in some cases the amount owed or interest rate can be negotiated down.
The FTC guidelines state that credit reports can include debts discharged in bankruptcy so long as they’re reported as discharged with a zero balance. 16 C.F.R. 600 app. § 607(b)(6). See also Schueller 559 Fed.Appx. at 737; Horsch, 2015 U.S. Dist. LEXIS 37476, 2015 WL 1344836, at *10. The only guidance on this at all close comes from the Federal Trade Commission regulation. It states, “A consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt.” 16 C.F.R. 600 app. 607(b)(6)(2010).
For more information about how a bankruptcy filing will affect you, please contact us at Arkovich Law
We are still doing loan mods for our clients – three alone this week – one in a Chapter 13 bankruptcy and two outside of bankruptcy. One has the docs to sign, another was presented with options including a principal reduction, and the other should be finished with underwriting and accepted in less than 30 days.
The June 2015 MHA Handbook Ver.4.5, revised on January 6, 2015 to Ver. 5.0, covers some of the procedures to be followed for borrowers who have filed bankruptcy and are seeking a loan mod to keep their home:
8.5 Borrower in Bankruptcy Borrowers who are currently in a TPP and subsequently file for bankruptcy may not be denied a permanent modification on the basis of the bankruptcy filing. The servicer and its counsel must work with the borrower or borrower’s counsel to obtain any court and/or trustee approvals required in accordance with local court rules and procedures. Servicers should extend the TPP as necessary to accommodate delays in obtaining court approvals or receiving a full remittance of the borrower’s trial period payments when they are made to a trustee, but they are not required to extend the trial period beyond two months, resulting in a total five-month trial period. In the event of a trial period extension, the borrower shall make a trial period payment for each month of the trial period including any extension month.
Sometimes our Florida foreclosure defense clients wait too long to challenge a foreclosure. This is the primary reason why we attorneys always post advice and blog incessantly about not letting a mortgage company get a default judgment or challenging a default if one occurs.
However, a client can also wait too long on the back end to challenge a final judgment. In Branch Bank & Trust Co. v. Michael’s Enterprises of Virginia, Inc., 519 B.F. 916 (Bankr. E.D. Va. 2014), a homeowner waited until a week after the sale and sought a temporary injunction which was denied. The sale proceeded and several months later the debtor refused to vacate the property and filed bankruptcy.
In the bankruptcy, the debtor attempted to collaterally attack the judgment already entered. Claims cannot be re-litigated, they can only be appealed. The Court awarded sanctions against the debtor, its shareholder and its legal counsel for $10,000. The debtor in this case attempted to argue that the foreclosure sale was a fraudulent transfer because it was for less than 70% of the market value. This argument failed to impress the U.S. Supreme Court in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) which was followed by the bankruptcy court.
Bankruptcy filings are down substantially in 2014 to only 910,090 which is the lowest number since 2007. Yet at the same time, people are still losing their homes especially in Florida, wages are flat or down and the cost of living continues to rise other than gas which isn’t too bad).
So why are the bankruptcy filings down? Well in some areas, the economy is picking up. Interest rates to carry debt remain low. But overall, I think some of this has to do with the fact that people cannot even afford to file. Many folks in the Tampa Bay area come to us to file when they receive a tax refund – but this year, many people had their tax refund intercepted due to defaulted federal student loans.
There is a way to file bankruptcy on the creditor’s dime that no one really talks much about: talking to an attorney about pursuing debt collection violations. Not all bankruptcy attorneys do this, so you need to talk with someone who actually sues for creditor violations plus files bankruptcy.
Great news for Florida consumers with student loans! On April 21, 2015, the Middle District of Florida, Tampa Division, Bankruptcy Court issued a ruling on behalf of our client that a National Collegiate Student Loan Trust would be barred from pursuing student loans in Florida because the five year statute of limitations had expired. In doing so, the Court entered Final Judgment in favor of our client.
However, NCSLT apparently did not like this ruling and has subsequently filed an appeal. As neither party has submitted briefs yet, the outcome of the appeal remains unknown and should be resolved in approximately 4-6 months or less.
These clients owe a devastating $161,000 in private student loans. They also owe only about $20,000 in federal loans for which payments are current in a repayment program. However, prior to hiring us, these clients were not presented with realistic payment terms from the private lender. The household income for this family of four is only $40,000 as they have two young children and the wife stays at home to care for them.
Today, a legislator introduced a bill to treat student loan debt as other unsecured debt in a bankruptcy filing. This would be huge! As everyone knows, a bill isn’t a law and it could be awhile, but if this gains steam, we may have some relief for graduates over the past 20 years who are facing student loans that the new governmental forgiveness programs don’t cover.
Rep. John K. Delaney, D-Md., introduced the Discharge Student Loans in Bankruptcy Act (H.R. 449) on January 22, 2015. The bill itself can be found here. This link can also be used to track its progress through the House, Senate and finally the President if it makes it through. I just checked the link and the text of the bill isn’t up yet, but it should be in a couple days. I’ll be curious to see how it is worded and other legal commentators’ opinions of its likelihood of passage.
Presently, the burden to discharge student loans is not easy. The Brunner standard of what it takes to show an undue hardship is very difficult to meet. However, this 1987 case is starting to come under fire because of the impossible standards imposed. Over the past year, there have been approximately a dozen federal cases providing a framework for a new standard allowing for discharge of student loan debt. Brunner has some competition now.
Reboot Your Life: Tampa Student Loan and Bankruptcy Attorney Blog