Friday, February 12th, 2010
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.
What happens if you need to file a Chapter 13, you have not yet filed your tax return for last year, but you know that a refund will be coming your way. The simple answer is that unless you are paying back your creditors at 100%, your Chapter 13 will demand that you turn over your tax refund check, and will use that money to pay your creditors. If you know that a refund is headed your way, make sure to tell your lawyer before you file – there are some steps you can take to preserve some or all of your tax refund money.
Your Chapter 13 trustee will also want future refunds paid to the trustee. This situation is easier to handle – you will want to adjust your payroll withholdings so that you do not have any refund coming. As far as the Chapter 13 trustee is concerned, your tax refund is kind of like a savings account that artificially reduces your net pay amount.
All of the Chapter 13 trustees in the Northern District of Georgia require debtors who are paying less than 100% to creditors to include in their Chapter 13 plans a provision that authorizes the IRS to intercept any refund payable during the years that your plan is in effect and send this money to the Chapter 13 trustee. And until now, the IRS has cooperated with the Chapter 13 trustees in redirecting refund money.
In January, 2010, however, a federal district court in Michigan has rules that the Chapter 13 trustee does not have the power to compel the IRS to serve as its collection agent. In the case of United States v. Carroll, a judge in the Eastern District of Michigan ruled that there is no legal basis for the IRS to withhold money and deliver it to the trustee because Congress has not waived the IRS' "sovereign immunity" that would otherwise leave the IRS vulnerable to contempt actions and other enforcement actions by the trustee (in other words, if the IRS failed to withhold a debtor's refund, the trustee would not have the right to sue the IRS for damages or for remedial action). The Michigan judge issued an order forbidding the bankruptcy courts there from confirming any Chapter 13 plan that has the income tax refund seizure language.
I would not be surprised if bankruptcy courts elsewhere in the nation begin to follow the path set by the Michigan judge. We'll know soon enough, but I suspect that the trustees in the Northern District may discontinue their demand for an income tax provision involving the IRS in Chapter 13 plans.
I do not expect, however that Chapter 13 trustees here or elsewhere in the country will permit Chapter 13 debtors from keeping large tax refunds. I suspect that trustees will still demand provisions that obligate debtors to tender their tax refunds but they will expect the debtors to send in the money, rather than having it withheld by the IRS. I will continue to advise my clients to minimize their refunds to avoid the problem entirely.
Needless to say, losing this automatic tax refund payment mechanism will make enforcement of tax refund plan provisions much more difficult. It will be interesting to what if anything Chapter 13 trustees do to address this potential administrative nightmare.
Posted in 2010, Bankruptcy, Chapter 13 issues, Chapter 13 plan calculations, Irs, Tax issues, a, an, automatic, chapter 13 plan, chapter 13 trustee, court, courts, district, enforcement, federal, forbidding, income, intercept, issued, january, judge, keeping, language i, large, losing, mechanism, michigan, money in, order, payable, payment, plan, provisions, redirecting, refund, refunds , seizure, tax, tax refunds in chapter 13, the, | Comments Off
Saturday, October 24th, 2009
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.
First, it does make a difference whether the small business is incorporated. If your small business is a proprietorship (i.e. "Tom Smith d/b/a Tom's Lawncare") then there is no way to separate personal assets and debts from business assets and debts. In this situation, all debts are "personal" because the proprietorship does not have a separate identity from the individual. All debts would have to be listed – for bankruptcy purposes in this situation, there is no difference between your personal credit card debt that arises from gasoline and grocery purchases and a credit card that you use for business purchases.
Assets of the proprietorship would be considered personal assets – assets that do not fit within the Georgia exemption statute would be at risk.
In a Chapter 7, if you have non-exempt assets you would have to surrender those assets to the trustee or offer to buy the "estate's interest" from the trustee (usually at a discount from fair market value).
Note that any receivables of the business or any other property with potential resale value (i.e. customer lists, pending contracts) could be claimed as estate assets.
In rare instances a Chapter 7 trustee could object to your small business bankruptcy using an "income suppression" argument. This argument asserts that you should not be eligible for bankruptcy relief because you have intentionally suppressed your income by leaving a highly paid job or intentionally refused to maximize income opportunities.
If you are incorporated, the shares of your business are assets and you may very well be asked to justify a de minimus (i.e. $500) valuation that you put on those shares. I see this issue frequently when clients own service businesses. For example, I recently represented a client in an incorporated service business that had about $75,000 worth of equipment, but also had around $80,000 of credit card debt, $2,000 of tax debt and was behind on rent and facing a possible eviction. What is the value of the shares in this case? Is it $75,000 under the theory that the equipment was not subject to any lien and could be liquidated? Is it zero under the theory that the business (and my client as personal guarantor) could be liable for a fraudulent transfer if it liquidated the equipment when the business was insolvent? Or is the value somewhere in between zero and $75,000 using a compromise argument?
The income suppression argument described above also applies when the individual debtor's business is incorporated. I have seen trustees take the position that a debtor with a certain level of education and training should make a reasonable effort to monitize that education rather than chase an entrepreneurial dream at the expense of creditors.
In the case of an incorporated business where the debtor has partners, the Chapter 7 trustee may become a replacement partner by virtue of his trustee powers and thereafter force a liquidation or a buyout.
I usually advise my clients who own small business clients that there is a possibility that the trustee may demand that the business close its doors and that they may have to find a new line of work. This possibility is less likely if the business is a service business that does not involve hard assets or inventory, and more likely if there are business assets with value or receivables.
Needless to say there are a myriad of potential issues for small business owners who are thinking about filing a personal bankruptcy. As always, you will benefit greatly by seeking counsel before your situation becomes critical.
Posted in General consumer bankruptcy info, Georgia Bankruptcy, Protected property issues, Tax issues, atlanta bankruptcy, jonathan ginsberg, small business and personal bankruptcy, solo practitioner bankruptcy | Comments Off
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.