What Happens If I Owe Taxes While In A Chapter 13 Bankruptcy?

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Bankruptcy Research | North Carolina Bankruptcy InformationWhen you file for a Chapter 13 bankruptcy, there may be a chance you could end up owing taxes over the three to five years that you are in the bankruptcy.  If you do happen to owe taxes while in a chapter 13 bankruptcy, the IRS or State that you owe may file a proof of claim. This is a legal document that states how much you owe a creditor. Depending on the amount you owe, the bankruptcy Trustee may need to increase your payments. The amount that the payments would increase depends on how much you owe.

In a Chapter 13 bankruptcy, taxes owed are paid back in full. Depending on what you end up owing, your payments could end up needing to be increased to ensure you pay back everything owed in taxes before your bankruptcy is closed. Your attorney and the Trustee will typically work this out and let you know what the payments will end up being.

To ensure the greatest chance of success in your Chapter 13 bankruptcy you should be sure you try to fix your deductions so you are breaking even each year. Ideally, you don’t want to get a large refund each year (the Trustee could take this if you do) and you don’t want to owe each year because that could cause your monthly payments to increase to an amount more than you can afford within your Chapter 13 bankruptcy.

So what’s the bottom line? Fix your deductions so you don’t continually owe more in taxes over the course of your bankruptcy. If you do owe, contact your attorney and they can work with the Chapter 13 Trustee and the taxing agency to try to ensure you can stay within your Chapter 13 bankruptcy.

Can I Collect Rent If I’m Surrendering Rental Properties in Bankruptcy?

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Am I Personally Responsible for the Taxes Owed On My Business?

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The Internal Revenue Service (IRS) uses a basic logic that if you have any signing authority over the business bank account, then you can be held personally responsible for certain taxes owed by that business.  So, yes, if you own a business or part of a business, be prepared to pay certain accrued taxes. This is especially true if you have a sole proprietorship. Additionally, no matter what type of business you own or owned, you also need to be careful when it comes to taxes that you should have paid as an employer – for example, the necessary taxes you pay to the government for your employees (social security, etc.). These can later be assessed as “civil penalties” which you are personally responsible for, even if the business later dissolves.

Taxes Owed on Business | Filling Out Paperwork

The general rule when it comes to taxes is that the government – state or federal – almost always gets paid.

What if you have dissolved the company?  Unfortunately, dissolving a business will not eliminate any tax debt or liability.  Even filing bankruptcy will not take care of all taxes.  Generally speaking, the only time taxes may be wiped out in a bankruptcy is if they were filed three years prior to the bankruptcy filing date.  The civil penalties mentioned above are also taxes that you can be personally responsible for even if the business has been dissolved.

If you owe a large amount to the government for taxes and are having a hard time coming to terms for a payment plan with the IRS, you may want to look into filing a Chapter 13 bankruptcy, which is a structured repayment plan.  This will keep the penalties from accruing and enlarging your original balance owed.

If your business is still operational, you may look into reorganizing your business debt in a Chapter 11 bankruptcy.

The bottom line is that even though you can still be held personally responsible for certain business taxes, you are not limited to repaying your taxes outside of bankruptcy. Certain types of bankruptcy may actually be a better alternative for you when it comes to setting up a repayment plan.

What Should I Expect at a Workers’ Compensation Mediation?

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In North Carolina, if a party to a workers’ compensation case, such as an injured worker or an employer/insurance company, has requested a hearing in front of the North Carolina Industrial Commission by filing a Form 33, a mediation is required by state law. However, if an agreement or settlement is reached by all parties before the mediation, the mediation is not necessary. Sometimes, the parties agree to an informal mediation between themselves.

The purpose of the mediation is for the parties to come together, with the assistance of an approved mediator, and try to settle the matter without the cost and expense of a formal hearing in front of a deputy commissioner, who is similar to a judge.

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Want To Know What It’s Like To Be Harassed By A Creditor? Real Phone Call

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Many of those who are facing financially tough times right now are stressed out even more by creditors who call non-stop. Creditors push the boundaries on what they may and may not do to collect a debt.

For example, here is a voicemail a client of ours emailed us the other day. Our client allowed us to post this voicemail so others could see they are not alone with the constant and harassing phone calls.

After receiving the voicemail we called the number back and spoke with someone with the company. They explained they didn’t know our client had filed bankruptcy. However, we confirmed their mailing address was accurate and explained we had previously sent proper notice of the bankruptcy. We then let them know they were violating the Fair Debt Collection Practices Act and any further attempt to collect on this debt would be met with a motion for sanctions.

They told me they didn’t do anything illegal and, after explaining I had a recording of the voicemail, they hung up on us. Before doing so, they explained they would notate in their system that our client had filed bankruptcy and she would not be contacted again. To date, she hasn’t received another call.

Regardless, this phone call shows some creditors will do whatever it takes to collect on debts. If you believe a debt collector is overstepping the boundaries let them know that they are violating the Fair Debt Collection Practices Act. It is important to keep detailed notes about who you spoke with (including their identification information), what time they called and what they said. Without this information it is difficult to be successful in a motion for sanctions against the creditor.

Should I Refinance My House to Pay Off Debt?

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Family Sitting in Front of HouseDesperate times require desperate measures or so the saying goes.  If you are struggling to pay your debts, primarily the result of the minimum payments on credit cards, medical bills, personal loans, taxes, student loans, etc., should you consider refinancing your home to pay off the debt?

There are several factors to consider. First, you must determine if you have any equity in your home that would allow you to refinance and take the excess proceeds to pay off your debt.  Unfortunately, with the downturn in the economy fewer and fewer people find they have equity in their home.  However, if you are one of the lucky ones that have equity in the home, you need to decide if consolidating the debts into the mortgage loan is your best option.  Is it always a bad idea to refinance your home to pay off debt, no, but you need to consider the pros and cons before you make the decision.

Pros:

The payment on the debt can be spread over the terms of a mortgage, often 30 years, therefore reducing the payment each month.

The interest rate on the mortgage is usually considerably less than what would be paid on credit cards, so there is an automatic savings.

The interest from the mortgage loan can be deducted on your taxes; interest on credit cards and most other personal debts cannot be deducted.  (Interest on student loans is the exception.  It can be deducted, but the deduction is limited and phased out as income reaches a threshold.)

You will be making one consolidated payment each month so there is a convenience factor.

This all sounds great, so why wouldn’t everyone just refinance their home to pay off their other debt.

Cons:

The monthly payment on the home mortgage is larger after refinancing and can be a stretch for the family budget.

If you are unable to make payments on the mortgage due to illness, loss of job, etc., the mortgage company can foreclose on the home.

Again, refinancing the home is not always a bad idea, but you must realize you have placed your largest asset, your “home”, at risk.

Do I Have To List My Business Assets on My Personal Bankruptcy?

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This is an excellent question.  For the most part, our bankruptcy clients who have businesses fall into two categories. The first category consists of those who feel as though they and their business are “one” entity. The second category consists of those who feel as though their business is a completely separate entity. Often, when clients drop their paperwork off at our office and we question what business assets exist, clients will reply, “Well, that doesn’t belong to me, that belongs to my business.”  So the real question is: what needs to be listed as assets in your bankruptcy and what does not?

Technically, ALL of your assets need to be listed.  Therefore, going back to our previous blog post on whether or not tools are protected we can examine debtor-owned businesses based upon the same scenarios.  Let’s use the example of Joe Blow’s Lawn Care.  Joe owns Joe Blow’s Lawn Care.  The lawn mower, rakes, blower, hedgers, etc. all belong to Joe. If he decided to no longer run the company next week, the only difference would be that the tools would move from his truck to his garage at home. These tools would need to be listed in Joe’s personal property and protected by the exemption known as “Tools of the Trade” as long as Joe is using them in his business. If Joe were to be sued, he would need to protect those tools as he would any other asset (such as a bank account or vehicle) he has from seizure.

Referring back to the same situation as discussed in the previous blog post, let’s use the scenario that Joe went to the Secretary of State and registered his company as a corporation.  Now Joe Blow’s Lawn Care, Inc. is the owner of the tools.  Even though the company at this point in time owns the tools, let us not forget that in the end scheme of things the debtor owns the company.  That company is an asset in itself; therefore the tools would be listed on the business balance sheet, included as an asset and the Joe’s portion of equity from the corporation must be listed in the bankruptcy and protected.

Regardless of how large or small, the court looks as personal assets all in the same; they need to be listed and at least attempted to be protected in the bankruptcy.  Again, it goes back to the confusing question of how the business should be treated for bankruptcy purposes.  Since businesses can get quite complicated at times, we strongly suggest that you thoroughly discuss your business and any other assets you or your business may have with your attorney so they may advise you properly to ensure your assets are protected.

Do My Taxes Have To Be Filed Before Filing for Bankruptcy?

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Filing Taxes Before BankruptcyYou will notice when you are filling out your paperwork that the court asks you for what seems to be a billion pieces of documentation ranging from copies of bills, papers from purchases, income advices and federal and state taxes.  These documents are asked for to verify information you are providing is true and accurate.

However, what happens if you haven’t filed your taxes?  Can you still go through the bankruptcy process or must your taxes be done beforehand?  The answer is you must have all prior tax years filed and received by the IRS and state in order to file the bankruptcy. There are several reasons why taxes are required to be filed and received before filing your bankruptcy.

The Bankruptcy Trustee, Bankruptcy Court and Bankruptcy Administrator Require It

As your attorney, are required to send a copy of your most recent tax year to the bankruptcy Trustee.  If they do not get the taxes before the 341 creditor’s meeting then they technically has the right to dismiss your case.  When April 15th (or the appropriate deadline depending on the year) hits, the bankruptcy Trustee will expect taxes to be filed as completed. What if you’ve received an extension?  Even if you have received an extension, if you are filing bankruptcy you need to file the taxes before filing for bankruptcy. This does not mean you have to pay on taxes owed but they at least need to be filed.

The Bankruptcy Administrator’s office randomly elects cases to audit. They do this to ensure bankruptcy lawyers are performing their duties but also to ensure clients are providing accurate information. It is similar to being audited by a taxing agency. If your case is randomly selected to be audited then we are required to provide those documents.

Taxing Agencies Want to Ensure Taxes Are Completed

In addition to the bankruptcy Trustee and bankruptcy court needing to see evidence of your tax filings – the taxing agencies, the Internal Revenue Service and the North Carolina Department of Revenue, also will receive notice of your bankruptcy filing and want to make sure information you are reporting is accurate.  Once they have word that you have filed a bankruptcy they will reassess your prior year’s taxes to make sure they are completed.  If they are not, they can object to your discharge until they have been completed.  If a creditor, such as a taxing agency, objects to your discharge it means your case will be held open longer.  The longer your case is open, the longer it takes to get your financial freedom.

Filing Taxes Allows You to Accurately Budget Repayments

Just like any other debt you have in your bankruptcy – the amount owed for taxes has an impact on your bankruptcy filing.  If you have not filed your taxes, and you are filing a Chapter 7 bankruptcy, then you have no way of knowing what you owe, and cannot go ahead and budget a repayment plan going forward.  If you file a Chapter 13 bankruptcy, and you have not filed taxes yet, then the IRS or NCDOR is going to estimate what you will owe them and file a Proof of Claim for un-assessed returns.  Oftentimes, the taxing agencies file the proof of claim as a worst-case scenario on your taxes, which typically, means the amount is overstated which can cause an increase in your Chapter 13 plan payment. If you file your taxes then the IRS can use the amount of taxes owed to file a more accurate proof of claim, which may increase your chances of success in a Chapter 13 bankruptcy.

The bottom line is, yes you have to file your taxes before filing your bankruptcy. We understand that it’s a pain to have to dig through your paperwork, retrieve the documents, make copies and bring them to us, but the government requires it as part of your bankruptcy documentation.