As you probably know, there are two types of consumer bankruptcy cases available to you – a Chapter 7 which wipes out debt, and a Chapter 13 which creates a five year payment plan in which you pay back some or all of your debt with your “disposable income.” When I prepare a Chapter 13 case, we work with you to create a liveable budget. The money “left over” after you pay for housing, food, transportation, insurance, utilities and other necessities must be sent to the Chapter 13 trustee, who then disburses these funds to your creditors based on a plan of reorganization that we submit to the court.
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With a sluggish economy, I have met with an increasing number of small business owners who are considering personal bankruptcy to deal with credit card debt and personal loans, but who want to keep their business assets and credits separate. Is this possible.
More on Will a Personal Bankruptcy Affect my Small Business if I am Self Employed?
The video below was recorded by my friend and colleague Darrin Mish of Tampa, Florida as part of the video section of his Get IRS Help web site. I met Darrin several years ago at a tax problem resolution seminar and I regularly refer tax problem clients to him. Unlike most areas of the law, tax problem lawyers can represent taxpayers all over the country – Darrin’s office happens to be in Tampa, Florida, but he assists clients all over the country. Darrin also publishes a helpful blog about solving IRS problems.
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In Chapter 13 cases filed in the Northern District of Georgia, both the IRS and the Georgia Department of Revenue receive notice of your filing. In my office, I include both the IRS and Georgia as "notice creditors" in every case filed.
More on Unfiled Tax Returns – No Matter What the Reason – Create Havoc in Chapter 13 Cases
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Several years ago, I attended a tax problem resolution seminar in Denver with the intention of expanding my practice to include tax issues. One of my classmates at the seminar was a lawyer from Tampa named Darrin Mish. Over the past few years, Darrin has built a growing tax problem resolution practice with clients in Florida as well as nationally (since IRS problems are federal, your search for a tax problem lawyer need not be limited to your local area).
More on Discharging Taxes in Bankrutpcy – Recommended Resource
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I recently received an email from a very concerned Chapter 7 client who I represented in 2006. My client had suffered a fairly drastic reduction in his income and as part of his Chapter 7, he surrendered his home, which has a fair market value of approximately $650,000. There were no objections in this case, and my client received his discharge as a matter of course.
More on Are There Tax Consequences if You Surrender Your Home in Bankruptcy?
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With an increased emphasis in the new Bankruptcy Code upon a debtor’s income history, self-employed or commissioned sales debtors will find a hostile reception in Chapter 13. A recent case on which I have been working illustrates the problem.
My clients are self employed real estate agents, both in their 60′s. Residential real estate sales can be a good business, but it can also be cyclical – with some months yielding a nice income and other months completely dry. In this case my clients had close to $100,000 in credit card debt and close to $200,000 in income tax debt.
As an aside, real estate agents often have income tax problems because of the nature of their income. Funds are not always there when it comes time to pay quarterly estimates – the estimated payments are based on the previous year’s income. In addition, the sales cycle of listing to closing may be four to six months, which means that cash flow can be a problem.
In this particular case, we had to file earlier than I would have preferred because we were trying to beat the filing of a tax lien. Most of the tax debt in this case was "stale" for bankruptcy purposes, meaning that we could treat it as unsecured debt. Once a lien was filed, we would be stuck paying the entire amount as secured debt.
The problem we faced arose from my clients’ income in the six months prior to filing. The spring and summer months were realtively good for income purposes, resulting in an average monthly income that had no basis in current reality. This fall and winter had been very poor months for home sales, perhaps because of the rise in interest rates and tightening of mortgage underwriting standards.
When we ran a "means test," the calculations showed that my clients had close to $2,000 per month in disposable income. The problem – in November, my clients’ gross income was just short of $2,000.
I suggested that we consider a "step" plan that provided for a lower payment during "lean" months and a higher payment during spring and summer, which are traditionally better for real estate agents. At this point, my clients were wary about agreeing to this because of their concern that they could be digging a deeper hole for themselves.
We also discussed taking the case to the judge, but I really have no basis to argue that my clients’ income will not match that of 2005. I suspect that in this case, my clients are spending money for products and services that they are not completely documenting. I do not suspect any wrongdoing, but I do think that $20 here and $25 there are adding up, leaving them with no money at the end of the month.
We decided to leave the plan at the $2,000 per month figure for now. In six months, if the income situation has not improved, we will amend the plan and go for a reduction based on real life numbers. I have no doubt that this strategy will result in a great deal of hardship for my clients, but I don’t have any other ideas.
My conclusion – Chapter 13 has become even more unfriendly to self-employed and commision sales debtors.
Technorati Tags: Chapter 13, bankruptcy and commissioned sales debtor, real estate agents and bankruptcy, discharge tax in Chapter 13 bankruptcy, means test
More on Chapter 13 Plan Strategies for Self Employed Debtors
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Tax problem attorney Darrin Mish of Tampa has recently begun publication of his "IRS Problem Solver blog." As you might imagine bankruptcy filings are often driven by tax problems. If you have tax problems in the form of unpaid taxes, huge penalties and imminent collection, it might make sense to speak to both a bankruptcy lawyer and a tax problem lawyer like Darren to review all of your options.
More on Debtor Uses Threat of Bankruptcy to Negotiate an 83% Reduction in Tax Debt
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I recently worked on a case that demonstrated the need for Chapter 13 attorneys to remain alert when dealing with county property taxes and Chapter 13 debtors.
In this case, my client was both delinquent in his payment of county property taxes and his taxes were not being escrowed by the mortgage company. Because of the delinquency, I included the county tax commissioner as a creditor in the case. Because my client's county property taxes were not being escrowed, I allocated approximately $300 per month as a monthly tax escrow so that he would be able to pay the tax bill later this year.
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