Bankruptcy and Income Taxes and Tax Liens

Posted on by David Nelson

The California Board of Equalization and California Franchise Tax Board are a bunch of rats clamoring over a cadaver with very little meat left on it’s bones. If you ever make an offer to compromise a debt, never have the money in an account with your name on it. Your attorney’s trust account might be a good place.

DISCLAIMER: Nothing in this article OR WEBSITE may be mistaken as legal advice. Attorney David Nelson, is licensed only in California, and this article is intended only for readers in California. This article is for entertainment, educational, extra-curricular, and medical purposes only. If you decide to rely on this, heaven help you. Remember also that I’m not a tax attorney, I’m a bankruptcy attorney in Murrieta near Temecula CA.

Chapter 7

Yes, you can discharge taxes in bankruptcy. No, not all of them but some of them. I hate to mention this part, when it comes to credit cards, medical bills and collection agencies, I only want one statement so that I have the addresses, account numbers and balances. But with the IRS, Franchise Tax Board and Board of Equalization, I want you to bring every letter with you that they ever sent you. In those letters are the answers to many of the questions and rules we will go over below. California sales taxes are calculated against gross receipts and therefore discharge in bankruptcy under ALMOST the same rules. For the specifics of the noticing requirements which you must give the California Board of Equalization in an article written Mark Sharf regarding the Ilko case, Ilko v. California Board of Equalization, click HERE.

To discharge income taxes, whether Federal or State, or California Sales Taxes, many rules have to be followed. Because this article only discusses income taxes, then it is important to remember that these are taxes that are assessed against gross income or gross receipts. See 11 USC 507 a 8 and 11 USC 523 a 1

There are several rules involved. What’s worse is that the rules all involve the timing of the bankruptcy. Often you’re in my office because of a lawsuit or a wage garnishment, or your bank account has recently been levied and you want to file immediately in order to stop the bank or your employer from sending your money to the Sheriff’s Office.

Problem is this, if you owe a bunch of money to the IRS and have to wait to file your bankruptcy in order to get rid of the tax, you’re going to have to decide whether the amount of tax to be discharged is more or less important than the amount of money the Sheriff is about to take away from you. Notice that I said more important not bigger.

The Rules

  1. The tax year must be over. Kind of a “No Duh” moment.
  2. The tax return (if required) must have been filed. This is also sort of a “No Duh” moment. Prior to 2005 you used to be able to discharge the tax even you hadn’t filed your return if you chose to file a chapter 13 bankruptcy instead of a 7. Many great things about the bankruptcy code were eviscerated in 2005 when republicans and democrats who had taken hundreds of millions of dollars in lobby money over the course a decade finally gave us bankruptcy reform. Conveniently this happened right at the start of the economic downturn. Literally, the housing market went flat one month before the bankruptcy reforms went into effect. Hmm, I wonder how the banks knew it was finally time to get the bankruptcy reforms passed? Bottom line is, if you owe federal or state income taxes in California and you haven’t filed your returns, your bankruptcy is not going to help you get out of paying your taxes. So file your tax returns, make sure you get proof that they received them, and call back in two years. But what if you were audited, and at the end of the audit, you signed the audit, that is not a substitute for your filing of your return? What if you didn’t file a return and the IRS files one for you? When it comes to filing returns, YOU must be the one who files it, not the IRS, or other taxing authority. If you cannot remember if you filed the returns, contact the IRS and get an IRS Transcript for the tax year or years in question. You can download the Transcript request from the IRS website.
  3. If it turns out that you didn’t file your return, then you will have to decide if you want to file your tax return now and then wait for just over two years to file your case, can you handle the other wage garnishments, bank account levies and lawsuits that will take place during that time. You will have to weigh the amount of tax you can get rid of compared to the amount of wages that will be garnished and what will happen to your bank accounts and having to go to court for judgment debtor exams, and if you don’t go to the judgment debtor exam, the court will issue a bench warrant for your arrest and on and on.
  4. DISCLAIMER: Make sure that you speak with an attorney now and get this advice from an attorney as bona fide legal advice before you make your decision. This article is not your legal advice.
  5. The tax return’s due date must have been more than 3 years prior to the filing date of your bankruptcy petition. Notice it says “Return’s Due Date”. Commonly called the 3 year rule, this is where most people stumble and file their bankruptcy petition too early. Tax Returns are due in April! On top of that, if you got an extension to August, then they were due to be filed in August. What if you extended to October? If you cannot remember if you extended, contact the IRS and get an IRS Transcript for the tax year or years in question. You can download the Transcript request from the IRS website. Alternatively if there is nothing else pressuring you to file you could just wait until October 20th to file. I assume you can get a tax transcript from the Franchise Tax Board or Board of Equalization if you need one. A little while ago, the IRS decided that all extensions were automatically extended to October 15th, I don’t remember which year that started, but from now on, if you think you filed your extension to August, then you must file your bankruptcy in November 3 years later.
  6. If you filed your tax returns late, your returns had to have been filed with the IRS or other taxing agency at least 2 years prior to filing your case. This is true whether you owe income taxes to the IRS or the State of California or whatever state you owe taxes too.
  7. Assuming you have beaten the 3 year rule, and the late filing rule, you still have to have beat this one. The tax must be assessed at least 240 days prior to filing your bankruptcy petition. That’s about 9 months. Assessed means that they have decided you owe, how much and told you so. In California, you get a letter that says: Notice of tax due. It won’t say “assessment” and probably won’t say “assessed” either. California’s notice of tax due is a weird animal, it does not become effective until 60 days after they send it. So, in California, it’s a 300 day rule from the first letter. Our Franchise Tax Board will send a 2nd letter stating that the notice is “final” and from there your 240 days starts. At this point people often ask the IRS, Franchise Tax Board or Board of Equalization if they will take less, give them a break. Called an offer to compromise, if you’re going to file a bankruptcy, DON’T DO IT. An offer to compromise delays the 240 day rule. Sort of like the extensions on filing your tax returns under the 3 year rule. You have to add 60 days to the time that your offer is pending plus the time that your offer is pending to the 240 days. That can extend your 240 days automatically by 60 days even if you withdraw the offer to compromise the tax debt on the same day as you make the offer. If you filed a bankruptcy previously during the 240 day period and it was dismissed and now you have to refile, you must add the amount of time your bankruptcy was pending to the 240 days plus another 90 days. So, even if your previous bankruptcy was dismissed after a month you must add 4 months to the 9 months. That’s an overdue baby.

A client, and no kidding his real name was Groucho Marx, (the names were changed to protect the innocent) owed $50,000 to the Board of Equalization, and $250,000 to the IRS. And no kidding, his rich uncle, (it wasn’t his uncle) died and left him some money, 15% of the total taxes owing. After calling the IRS and talking them into taking a 15% pay off, the IRS put a condition on the deal, he had to get the State of California’s Board of Equalization to take the same deal. Stupid condition but that’s what they told him. So, he calls the BOE and says hey they’ll take 15% if you do, what do you say? Unfortunately, they said, “we’ll get back to you.” A week later they answered by taking all of his money out of his bank account.

Even if since Bush the IRS is kinder and gentler, the Board of Equalization and Franchise Tax Board in California are a bunch of rats clamoring over a cadaver with very little meat left on it’s bones.

“Maybe you can’t squeeze blood from a turnip, but you can eat the turnip.”
~David L. Nelson and yes, I just quoted myself.

Debt Consolidation Loans

Posted on by David Nelson

In Murrieta and Temecula there are great places to obtain debt consolidation loans. In many cases a debt consolidation loan is a fantastic financial tool for restructuring your debt and making life easier and finances manageable. Particularly when your debts are for the types of obligations that are not revolving or renewing.

If you’re considering a debt consolidation loan, a chapter 13 bankruptcy may be just what you need. A chapter 13 bankruptcy allows you to consolidate your debts and separate them into classes. You can reduce a car payment, both by cutting the interest rates and extending the term of the loan and paying it off ahead of the credit cards. You can include child support and income taxes and give them a higher priority in the payment plan so that they get paid off completely and ahead of the credit cards too. Your credit cards and medical bills and gambling markers get paid whatever is left over.

Example: if you owed $15000 on a car, $15000 in back child support and $30,000 to credit cards, and if your budget only allowed a payment of $700. You’d setup a 60 month plan for $700/mo. Normally you’d have to pay probably $1500 to $2000 per month on that debt depending on interest rates and terms. Of the $700/mo that you would pay for the 60 month plan, your credit cards would get approximately only $200/mo. Less in fact because the bankruptcy trustee would take his fees out of that $200 and also the car would have a small interest rate applied but not compounded.

Recent Taxes

While sufficiently old enough income taxes can be discharged in a bankruptcy, more recent income taxes cannot be. Income taxes that date back only one, two or three years cannot be discharged in bankruptcy. This is true in California for the Federal and State income taxes as well as California Sales Taxes. If the debt is sufficently high you may want to consider waiting out the time required and then filing a bankruptcy when they are ripe enough to do a bankruptcy.

However, if the debt would be manageable if you just had a low interest rate and a fixed payment for 36 or 48 or 60 months, then a debt consolidation loan might be right for you. Keep in mind that the interest that the IRS charges is 10% but on top of that, stiff penalties are added whenever the debt has a remaining balance. If you set up a minimum payment plan directly with the IRS, you’re having more than a 20% interest rate and unpaid interest and penalties are capitalized back into the loan. Worse is that if you end up owing money next year your payment plan will be cancelled and the full balance on both years will be immediately required by the IRS.

A Debt Consolidation Loan may be exactly what you need in this situation. As a quick side note there is a special bankruptcy rule which states that if you obtain a loan to pay a tax and then try to discharge the new loan in a bankrutpcy, you must follow the same bankruptcy rules as though it were still a tax in order to discharge it.

Student Loans and Back Child Support

Neither of these is dischargeable in bankruptcy. However, neither Student loans nor Child Support have that same rule as the income taxes. If you obtain a consolidation loan to pay off student loans or child support, and you later find yourself unable to pay off the new loan, there is no bankruptcy rule forcing you to follow the student loan bankruptcy rules nor the child support rules for the consolidation loan. So, they get discharged.

There are plenty of student loan debt consolidation programs and some have 20 year payment plans, or extended plans and some have income contingent plans. However my favorite is to just get a normal consolidation loan. It does better things for your credit files and credit scores and if you fall on hard times afterwards, you can discharge it in a bankruptcy.

Open Credit Cards with Zero Balances

By far the worst thing you can do is to consolidate credit cards with a new loan or line of credit. Examples I’ve seen come into the office include but are not limited to the following, a couple has $60,000 in debt consolidation loans and another $60,000 in revolving credit on 10 different credit cards. Ike, the husband had gambled up $60,000 in credit cards so his wife, Inez went to the bank and got a consolidation loan and paid them off. However, it left 10 credit cards open with zero balances.

That’s like handing an open bottle of Rum to an alcoholic pirate; no impulse control and he gambled them all up again.

In Murrieta and Temecula, if your debts are primarily credit cards consider filing chapter 7 bankruptcy or if you make too much money, file a chapter 13. Imagine how much happier Inez would be if she’d talked him into filing a bankruptcy instead of running up the 10 credit cards over again. How many arguments about money could have been avoided? How many arguments did they have about the low income, the missed vacations, missed investments, missed retirement savings? If those credit cards had been closed permanently, they might have stayed married.

I’ve seen a spouse get a consolidation loan, and then call all the credit card companies and close the accounts. It didn’t work. The other spouse just called all the credit card companies the next day and asked for the cards to be opened back up again. And the credit card companies did it.

If you’re considering a debt consolidation loan, a chapter 13 bankruptcy may be just what you need. A chapter 13 bankruptcy allows you to consolidate your debts and separate them into classes. You can reduce a car payment, both by cutting the interest rates and extending the term of the loan, and you pay it off ahead of the credit cards. You can include child support and income taxes and give them a higher priority in the payment plan so that they get paid off completely and ahead of the credit cards too. Your credit cards and medical bills and gambling markers and whatnot get paid whatever is left over.

All the cards are closed and no one is going to call back and reopen them either. Call me now and lets get you started doing something about your debts. Take action and fix your finances. 951-200-3613.

Debt Consolidation

Posted on by David Nelson

Non-Profit Debt Consolidation

There are tons of non-profit debt consolidators in the Murrieta and Temecula areas. In general what they do is, set you up with a debt consolidation plan. One place put it this way, “You will be able to combine most, if not all of your unsecured debt and make one single monthly payment.” Your accounts don’t vanish, you haven’t done a consolidation loan, but instead the debt consolidators pay your various accounts monthly as you pay the debt consolidation company. They claim that you will become more organized and eventually learn to understand your finances better through participation in the program. Finally they stated that debt consolidation “may reduce” your payments.

You may have heard that “those who can’t, teach.” Well, if someone wants to teach you about your debts, ask yourself how much they can do about it? (As an aside, most of the teachers I know are quite able and deserve more than they’re getting right now, but these debt consolidators are often not even college grads.)

Hmmm, “May Reduce”? Wait a minute, isn’t that why you are thinking about contacting these people in the first place, because you don’t have the income currently to meet all the financial obligations that you have right now? I doubt that’s the deal your looking for. I expect you’re looking for a will-reduce-your-payments type of plan. Certainly there are a few of you who can afford all of your debts and are just looking for a way to get organized and if that’s the case, maybe a debt consolidation company is right for you. But if you’re like most people who are looking into this you’re probably looking to make a bit more progress than that.

What most of these companies will tell you that they do is that they contact your credit card companies and medical bills and what not, and they negotiate a payment for you. Either they are going to try to reduce the principal, interest, extend the term of the contract or a combination of them.

But what they do not tell you is that, if they’ve been doing this for a while, they already know which of your credit cards are going to play ball with them and which will not. How could they not know? Think about it. However, they will never tell you that you have a card or account that won’t want to participate.

So, they set you up with a debt consolidation payment plan and never tell you that one of your accounts didn’t like the terms and decided not to participate. Instead, after getting a reduced payment or even no payment at all, 6 months or 10 months later, that card sues you. You call up and exclaim, Wells The Fargo! Why am I being sued? And the debt consolidators tell you, “oh goodness, it appears that they’ve decided not to participate.” At that point you’re going to have to file bankruptcy before you have your wages garnished or a bank levy hits your checking and savings accounts.

And why does that sweet little old non-profit debt consolidation company do that to you? For the money! Yes, fans that’s right, for the money. Just because they’re not for profit does not mean that the officers of the company don’t take a huge salary. It just means that they cannot declare a dividend to share holders. So, what difference does it make? Answer: You’re paying bankruptcy prices to non-lawyers for a non-legal service without the great results you’d get if you simply filed a bankruptcy instead.

So wait a minute, you’re only paying them $20/mo and about $300 down to set it up, right? (low end some charge you thousands) That’s a lot of months that they’ve set up your payment plan for. How much did they tell you? 48 months? 36 months? 36 x 20 = $720 and if they have 500 of you making payments through this type of plan that’s $10,000/mo plus $150,000 in set up fees. And as one debt consolidator put it, “I keep the float.” Meaning every month he’s got tens of thousands in his accounts collecting interest from his bank and he absorbs that interest for himself. And for all that they “may reduce” your payments which means that one of the credit cards may not participate and will sue you. Maybe not but good luck getting a guarantee out of them.

Chapter 13 Bankruptcy

Do you know what one is? It’s a debt consolidation plan with the Federal Bankruptcy Code behind it backing you up and forcing your creditors to listen up and back down. Creditors must take the plan. I love it, we reduce interest rates on creditors to 0% and often reduce principals down to 5% or 10% of the total balances.

Try as you might, you could pay off all your debts

The Bankruptcy Minute

Posted on by David Nelson

TheBankruptcyMinute.com

I met a new client today for the first time who was single and made nearly $12,000 over the median income. After putting in all of the client’s weekly pay checks into the computer and doing the 8 page analysis, I was able to determine that this client did indeed pass the means test.

By the time I was done with all the data entry and analysis of the various means test rules, the free consultation turned out to be a bit 2 hours long. Thankfully most don’t take as long to complete and come to a conclusion one way or the other. That was a bankruptcy-120-minutes plus.

Murrieta Bankruptcy Attorney

I don’t know if The Bankruptcy Minute might give a free consultation that long, or spend that much time for free on the means test for you. Call her and ask. MurrietaBankruptcy.com She’s another bankruptcy attorney in Murrieta, CA who has a great radio ad running.

It’s just that minute thing that got me to thinking. I don’t know about Attorney Mies, but so many bankruptcy attorneys will bring you in for a free consultation for a half hour. If your income is above the median income then that means test takes a long time to complete and it suddenly isn’t such a free consultation anymore. Again, I don’t know if Ms. Mies does that or not, I’ve never heard that she does. Call her and ask how long her consultations are.

I heard from Attorney Lorene Mies who runs the Bankruptcy Minute ads.

Because Friends Don’t Let Friends Pay Credit Cards From Savings

Posted on by David Nelson

Why Bankruptcy? Because Friends Don’t Let Friends Pay Credit Cards From Savings
Legal Notice: You are not my client, this is not legal advice, it’s a bunch of codswallop and hogwash, rely on it at your own peril, nor does reading this article make you my client. If you rely on this information and use it in your case and it goes badly for you, tough noogies.

So you’ve lost your job, broken your leg, gotten a divorce or someone has died.

You find out that on top of the $20K in credit card bills that you knew about, there’s another $30K that you didn’t.

I’ve heard all of this before.

Let this be a lesson to you, if you are letting your spouse do all of the finances, stop, wake up and smell the plastic. Go into the bills and read each one. If English is not your strong suit, bring a friend. Chances are, if only one spouse is ever doing all the accounting then that person may have bad things hiding in that pile of papers that he or she refers to affectionately as the bills.

No, it’s probably not a girlfriend or boyfriend, could be but probably not, but it could be a gambling problem or worse. And it could just be that after 15 years of spending $200 more per month than you earn, the total balances on all credit cards is now $36,000 higher than you thought. ($200 x 12months) x 15 yrs = $36,000. Of course it will be a bit smaller because of monthly payments or it could be a lot higher if some cards were used to pay other cards which usually happens after a few years of living that way.

I once had a client whose spouse had a gambling problem, that spouse had a friend who was a notary, who also had a gambling problem. They were partners in crime. While the innocent spouse was out to sea double entendre intended with the Navy, the stateside spouse and the in-cahoots-notary got together and created a 2nd mortgage and pulled all the equity out of the house and gambled it away while the innocent spouse was gone. Needless to say the innocent spouse also asked me if I do divorces, I don’t.

Face it, if you’re letting your spouse handle all of your finances, then guess what, eventually you’re going to end up alone and living la vida broke-a because you’ve only got a 50-50 chance of not getting divorced, but the other half end in death and either way, one or both of you ends up alone. I cannot begin to tell you how many widows and widowers I’ve met with who had no idea that the life insurance hadn’t been paid, had no idea that the cash value in the life insurance had been withdrawn and spent on girls, guns, boys, gambling, drugs, alcohol, and good times. More often, it’s like I stated in the first place, you’ve been living on $100 to $200 less per month and paying that difference with credit cards for the last 15 years, and I’ve seen that go on for 25 years as well. You’ve been just living a bit above your means, or your income.

So, you’re broke and alone and you realize that you’re not completely destitute, there’s some savings socked away somewhere.

Let’s say you find you’re left with $50K in debts on credit cards and unsecured loans, such as signature loans.

You’ve got $100K in your 401k plan, $20K in cash in the bank, some clothes, some furniture (no antiques or heirlooms), one 12 year old Honda Accord with a big rumple in the fender, you’ve got wedding rings that are 20 years old and you only paid $1000 for them back then (retail), your home is worth $200K and you’ve got a loan on it for $150K. And that’s all you’ve got.

You don’t have a job, you’re alone and you’re 50 years old, and you if you could get a job, you have no currently usable skills. Your only income is your dead spouse’s retirement which pays $1500/mo. What should you do? Please realize I can’t fit every scenario into one blog article. If you have specific questions you’ll have to call.

Most of your friends, Suze Orman and that buckets of money guy will probably tell you to pay off the credit cards with the cash and then tap into the 401k or pull some equity out of the house. Some of the financial pundits will get a little cheeky and say you should offer each credit card 30% or 40% and try to settle them for an average of about 35cents on the dollar. That way you could use the cash, not tap into the 401k or the house and still have a little left over. While it’s not a bad solution, remember that you still only have an income of about $1500/mo and your mortgage probably comes to about between $800/mo to $1200/mo depending on when it was refinanced last and many other factors. Even if your mortgage is low, how do you live on only $700/mo. It can be done but that’s a different article coming soon.

Why pay them even 35% when you could pay them 0%? After paying your bankruptcy attorney approximately $1500 in attorneys fees and the $300 filing fee for the case, you’ve only paid out about 3.5% of the total balances on the cards and loans. In CALIFORNIA you can keep the 401k, you can keep the equity in the house, you can keep the $20K in cash, you can keep the clothes and furniture, you can keep the little bit of jewelry, and yes, you can keep the old beater car. Is 3.5% better than 35%? No brainer.

In other words, you keep everything except the cost of filing the case. If any of the credit cards comes forward and says that that debt was created via fraud, you can say that it wasn’t your fraud, the missing spouse did it. And yes, even if the card is in your name, if it was identity theft, (your spouse stole your identity to create a card in your name), that’s not you committing fraud, it was your spouse. So sue him or her.

Bottom line, you’ve still got your 401k, your cash savings which must guard with your life because you don’t have a job. If you only spend $500/mo of it, it will last you 40 months on top of the $1500/mo in income that you do have in our little example above. You can see that if you can’t find a job in the next 40 months, then at least you had that much breathing room. If you paid out a 3rd of your savings to pay off credit cards then you’d have a year less than 40 months to find the next job. How much of a cushion is enough? With 40 months you could go back to school and finish a degree.

Sure they’ll tell you that employers are looking at your credit scores, and some do, but not if you have no interesting skills other than how to raise a family. I’ve got friends older than me who are working at Home Depot now. Great way to supplement the income but after years of raising a family there’s no other jobs they can do. I’m pretty sure credit was not an issue.

I’ll tell you about identity theft in another article.

For now, just realize that if you can keep all of your savings and file bankruptcy, why would you ever, ever do what the financial pundits tell you and pay off credit cards with savings when you don’t have a job? Anyone telling you to do that must have a freaking hole in their head. DON’T DO IT. Just Say NO. If you are not in California, go to the attorney of your choice and ask what you could keep if you filed a bankruptcy in that state. Also, if you live in Arizona, move to El Centro or the nearest California City closest to you and commute to work if you have a job or whatever you commute to and then file. That way you won’t be an Arizona resident when you file and, while you won’t get to keep $20K in cash like you would if you were from California, it will at least be substantially more than what Arizona will allow you to keep when you file.

Bankruptcy Means Test Basics

Posted on by David Nelson

Bankruptcy Means Test Basics

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Bankruptcy Means Test is the Chapter 7 Qualification Test. However, if you do not qualify for a 7, it is also used to determine the amount of your chapter 13 plan payment. Additionally, it determines the duration of you chapter 13 plan.

If your income is above the median income your chapter 13 payment plan must last for 5 years.

Reaffirmation Agreements

Posted on by David Nelson

REAFFIRMATION AGREEMENTS

A Reaffirmation Agreement is a new promissory note to keep paying on an old contract for the purchase of goods where the lender can repossess or foreclose the goods.

Bankruptcy Attorney David Nelson

Posted on by David Nelson

Temecula Bankruptcy Attorney David NelsonTEMECULA BANKRUPTCY ATTORNEY DAVID NELSON

I have been a Bankruptcy Attorney since the very beginning. Having graduated in the top 15% of my class I passed bar the first time and in June of 1994 I opened my law office.