Bankruptcy and Income Taxes

Posted on by

Although another tax filing deadline has come and gone, thousands of people still owe money to the Internal Revenue Service or the Arizona Department of Revenue. These taxing authorities are notoriously relentless in pursuing past-due income taxes. The good news is that most income taxes are dischargeable in bankruptcy, in many cases.

There are some preliminary matters. First, only 1040 and 140V taxes are dischargeable. This category includes taxes on wages, self-employment income reported on Schedule C, income from government benefits, annuity income, and similar sources. If you are unsure whether or not you owe state income taxes, consult a tax attorney, because Arizona has very specific residency rules.

Second, the filers must not have willfully or fraudulently evaded the taxes. Again, a tax attorney or other professional can offer insight into “willful or fraudulent” evasion, as these terms have a very specific meaning.

3/2/240 Rule

Although there are some slight variations, most courts strictly adhere to this rule to determine income tax dischargeability in a chapter 7 or chapter 13.

The income tax must be at least three years old. So, if you owe from tax year 2011, you cannot file bankruptcy until at least April 17, 2015 (April 15th fell on a Sunday in 2012, so the filing deadline was one day later). The timeline may vary if the IRS or ADR granted an extension or there was some similar anomaly.

Second, accurate returns must have been on file for at least two years, and some courts may require on-time filings. Substitute returns, or the documents that the IRS files on behalf of taxpayers whose extensions have expired, do not count.

Finally, the debt must not have been assessed within the last 240 days, which is approximately eight months. In most cases, the taxing authority assess the debt when they send the delinquent taxpayer a bill.

Collections Matters

The automatic stay stops civil penalty actions, criminal lawsuits, IRS appeals, wage garnishments, and similar collections procedures. Additionally, although the automatic stay does not extinguish chapter 7 tax liens, it does stop the IRS from placing these liens on your property.

Bankruptcy may be the answer to your tax problems. For a free consultation with an experienced Arizona bankruptcy attorney, contact us at (602) GOT-DEBT.

Bankruptcy Means Test: Happy Birthday, BACPA

Posted on by

This past April the cleverly-titled Bankruptcy Abuse Prevention and Consumer Protection Act turned 10 years old. Prior to 2005, chapter 7 liquidations made up about 70 percent of consumer filings. BAPCPA made it more difficult to file chapter 7, mostly due to the means test. The law’s authors must be reasonably satisfied, as the filing rate has fallen significantly in recent years.

To truly understand the means test, we need to take a trip in the wayback machine to 1996. That was the year that actor Burt Reynolds declared bankruptcy and discharged some $10 million in debt. Thanks to Florida’s liberal homestead laws, Mr. Reynolds kept his $2.5 million home. Many lawmakers, who were probably prompted by their credit card company donors, considered this result unjust.

As a brief footnote, Mr. Reynolds is having renewed financial problems and his house is currently in foreclosure.

The Means Test

Mr. Reynold’s bankruptcy, and a handful of others, fueled the popular idea that wealthy individuals rang up staggering debts on their credit cards thanks to their lavish spending habits, and then conveniently filed bankruptcy to avoid payment. Whether or not that idea is true is largely beside the point, because Congress took action against this perceived problem.

The means test is basically an eligibility requirement for chapter 7 bankruptcy. A debtor’s income must be below the government-mandated median income for that state. Currently, in both Arizona and Nevada, the median income for a family of four is just under $70,000.

That figure is not absolute, as certain debtors may be able to claim extra allowances that more accurately reflect their household budgets. Moreover, chapter 7 may not be a good option for your family. If you are behind on secured debts, like a home mortgage or a car note, and wish to retain the property, a chapter 13 wage-earner plan may be ideal. An attorney may also have non-bankruptcy options for dealing with your debt.

If you have unpaid debt, regardless of your income, speak to an attorney. Do not let an arbitrary line keep you from claiming the fresh financial start that you and your family deserve. For assistance in this area, contact an experienced bankruptcy attorney in Arizona today. We have 12 office locations throughout Arizona and Nevada.