Tuesday, November 22, 2016

Resolving tax debts outside of bankruptcy

Here at Shenwick & Associates, many of our clients have concerns about tax debts. However, our bankruptcy practice is over 20 years old, and in our experience, tax debts are more easily resolved than student loan debts.

In order to discharge taxes in bankruptcy, the taxpayer must show that:

  1. There is no fraudulent or willful evasion of the tax debt.

  1. The tax debt is at least three years old.

  1. A return for the tax debt was filed at least two years ago.

  1. The income tax debt was assessed by the IRS at least 240 days ago.

Other options outside of bankruptcy also exist for resolving tax debts:

  1. Currently Not Collectible (CNC) Status. If the IRS agrees that you can't both pay your taxes and your reasonable living expenses, it may place your account in CNC (hardship) status. While your account is in CNC status, the IRS will not generally engage in collection activity (for example, it won't levy on your assets and income). However, the IRS will still charge interest and penalties to your account, and may keep your refunds and apply them to your debt.

    Before the IRS will place your account in CNC status, it may ask you to file any delinquent tax returns.

    If you request CNC status, the IRS may ask you to provide financial information, including your income and expenses, and whether you can sell any assets or get a loan.

    If your account is placed in CNC status, during the time it can collect the debt the IRS may review your income annually to see if your situation has improved. Generally, the IRS can attempt to collect your taxes up to 10 years from the date they were assessed, though the 10-year period is suspended in certain cases. The time the suspension is in effect will extend the time the IRS has to collect the tax.

  1. Offer In Compromise (OIC). An OIC allows you to settle your tax debt for less than the full amount you owe. It may be an option if you can't pay your tax liability, or doing so creates a financial hardship. The IRS considers your unique set of facts and circumstances:

    Ability to pay;
    Expenses; and
    Asset equity.

    The IRS generally approves an OIC when the amount offered represents the most it can expect to collect within a reasonable period of time. However, to be eligible for an OIC, taxpayers must be current with all filing and payment requirements.

  1. Installment Agreement. If you're financially unable to pay your tax debt immediately, you can make monthly payments through an installment agreement. Before applying for any payment agreement, you must file all required tax returns.

Tax cases and their resolution are challenging, even for experienced practitioners. For advice on how to deal with your tax debts, please contact Jim Shenwick.

Thursday, October 27, 2016

Avoiding liens in bankruptcy

Here at Shenwick & Associates, the debtors that we represent (we represent creditors, too) are primarily looking to get their debts discharged in bankruptcy. However, what most debtors don't know is that besides getting rid of unsecured and secured debt, some liens or judgments secured by property can be eliminated by making a motion under § 522(f) of the Bankruptcy Code, which permits a debtor to wipe out the interest that a creditor has in property if the debtor's interest in the property would be exempt but for the existence of the creditor's lien or interest.

The most common types of liens that can be avoided under § 522(f) are judicial liens (a lien created when someone obtains a judgment against you and attaches the judgment against your property), but not including liens that secure a domestic support obligation); and nonpossessory, nonpurchase-money security interests. To qualify as a nonpossessory, nonpurchase-money security interest: (1) you (not the creditor) still possess the collateral; and (2) you used property you already owned as collateral for the loan, not money that you borrowed.

A lien is considered to impair an exemption to the extent that the sum of: (i) the lien; (ii) all other liens on the property; and (iii) the amount of the exemption that the debtor could claim if there were no liens on the property, exceeds the value that the debtor's interest in the property would have in the absence of any liens.

By way of example, let's assume that a house owned by a husband and wife has an appraised value of $500,000. The house is subject to a $200,000 mortgage. The husband and wife file for chapter 7 bankruptcy and have a combined $300,000 homestead exemption under New York State law. Prior to their bankruptcy filing, a judgment creditor records a $75,000 judgment against the house. The debtors may commence a motion under § 522(f) of the Bankruptcy Code to avoid or eliminate the $75,000 judgment docketed against the house.

To discuss whether lien avoidance as part of a bankruptcy filing would be a beneficial strategy for your debt issues, please contact Jim Shenwick.

Thursday, September 29, 2016

How to pass the "means test"

Here at Shenwick & Associates, we've written extensively about the "means test," which is a complex calculation that debtors must pass to qualify for relief under chapter 7 of the Bankruptcy Code if they're over the median income for their state and household size.

Since the means test was implemented as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, we've filed hundreds of Chapter 7 cases, and usually manage to vault potential debtors over the hurdle of the means test. Here are a few of our tips and strategies on how to pass the means test:

  1. Determine if a majority of a debtor's debt is non–consumer/business debt. If it is, they are exempt from the means test.
  1. Make sure that all of your expenses are listed: 
    • Taxes are deductible from the means test–includes FICA, Social Security, federal, state and local income taxes. These can add up for most debtors, and has made the margin of difference between passing and failing in many cases.
    • Involuntary deductions from wages, such as mandatory retirement plans, union dues, uniform costs, and work shoes, but not voluntary 401(k) contributions or loan repayments. 
    • Term life insurance, health insurance and disability insurance.
    • Payments on secured claims (for mortgage, car loans, etc.) coming due in the 60 months following filing, as long as the debtor is keeping the collateral. 
    • Continuing charitable contributions, up to 15% of gross income.
    • Child care expenses for babysitting, nursery school, daycare and preschool. 
    • Out of pocket health care expenses, to the extent they exceed the national standards amount of $54/month per household member under 65 and $130/month per household member 65 or over.
  1. Add other members to the household to increase household size. Bring the kids back home!
  1. If possible, reduce your income and your spouse's income for six months (the lookback period for the means test). 
  1. Make sure your expenses from a business or rental property are fully listed to minimize your net income. In one case, a client who was providing independent transportation services failed to listed his expenses. Once we listed those and deducted them from his gross income, he passed the means test.
  1. If you have a spouse, make sure that you're deducting any part of your spouse's income not used for the household expenses of you or your dependents (i.e. for your spouse's tax debts or support of people other than you or your dependents).
If you have questions about your unique financial situation and whether you might be eligible to file Chapter 7 bankruptcy, please contact Jim Shenwick.