Florida Bankruptcy Law Blog

Income Tax And Bankruptcy

read over materials about asset protection from income tax debt which had been published by Larry Heinkel www.taxproblemsolver.com. . Larry is an expert in the area of income tax debt in bankruptcy. His article pointed out some common misunderstandings about tax debts. First, Florida’s homestead law does not protect homeowners from income taxes. A tax lien attaches to your homestead unlike a civil judgment. Next, Florida’s statutes prohibiting creditors from garnishing wages of the head of household does not protect against IRS collections. Also, a divorce decree which specifies which spouse is responsible to pay tax liability is not binding on the IRS. The IRS can go after either divorced spouse for the full amount of tax debt.

Discharging tax debt in bankruptcy is complicated. The general rule is that Chapter 7 bankruptcy can discharge taxes for which the tax return was due to be filed more than three years prior to the bankruptcy. The "due date" is April 15 following the tax year plus extensions. Larry Heinkel points out that there are many events which can extend the due date for purposes of bankruptcy analysis. Also, tax returns first filed within two years of bankruptcy or taxes assessed within 240 days of bankruptcy cannot be wiped out. Taxes in bankruptcy is a very complicated area which is why Mr. Heinkel’s services are in demand. Make sure your bankruptcy attorney really understands the income tax rules.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Exxon Dealers Class Action As Bankruptcy Asset

have received a few calls in the past months from people who had filed bankruptcy several years ago and have been notified recently that they are entitled to recover money as part of a class action lawsuit brought by a class of Exxon gas station owners against Exxon. The latest caller said that at the time he filed bankruptcy he had not filed a claim to be included in the Exxon class and did not know he was eligible to file a claim. Nevertheless, it turns out that he had a cause of action as part of the class action at the time he filed bankruptcy. The class action administrators are refusing to pay him his share of the recovery until he gets an order from the bankruptcy court stating whether or not the recover is part of his bankruptcy estate.

This claimant/debtor probably has to reopen the bankruptcy case to amend his schedule of assets. Based on the facts presented, the debtor did not act in bad faith by failing to list a cause of action against Exxon because he had no knowledge of his right. My guess is that even absent bad faith the Exxon recover should be part of his bankruptcy estate and notices should be sent to his creditors. Even then, is the value of the asset the amount which would have been the present value at the time of the bankruptcy, or is it value the amount of recovery today including substantial interest. It will be interesting to see how the bankruptcy judge resolves this issue.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida

Means Test Exemption For Business Debts: Which Debts Count?

The "means test" for Chapter 7 does not apply to people whose debts are primarily consumer debts. In some cases, the analysis of a debtor’s debts focuses only on unsecured debts which are the class of debt that gets discharged in Chapter 7. Specifically, where one spouse files Chapter 7 bankruptcy and the spouse owns property jointly with the non-filing spouse, the debtor’s interest in marital property is exempt only and to the extent that the debtor and non-filing spouse do not have any joint unsecured debts. Joint secured debts do not affect the exemption of joint marital property. I am involved in a case which presented the question of whether the issue of business or consumer debt for means test exemption considered unsecured business debts or both secured and unsecured business debt.

I spoke by phone with an attorney from the U.S. Trustee’s office in Orlando. The attorney confirmed that for purposes of the means test qualification the U.S. Trustee considers both unsecured and secured business debt. If most of the debtor’s debt, secured and unsecured, is not consumer debt then the debtor does not have to pass the means test to file Chapter 7. This issue is important today when so many debtors are filing bankruptcy because of failed real estate investments. Debtors who are liable for large mortgages on investment property will often be exempt from the means test even though they have high incomes. Many people who qualified for large investment mortgages did so because they had high incomes. The U.S. Trustee attorney told me their office is seeing a relatively large number of Chapter 7 bankruptcies being filed by high-income debtors who escape the means test because of their mortgages on one or more parcels of investment real estate.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Is Unmarried Girlfriend Or Boyfriend Part Of A Bankruptcy "Household?"

People whose annual income is under Florida median income do not have to pass a "means test" to file Chapter 7 bankruptcy. Applicable median income depends on the size of your household. Household size is not the same as "family size." Many people have family members not living with them in the same household. Last week I received a phone call from a prospective bankruptcy debtor who lived in the same household with his girlfriend. They had a child living with them. The question is whether an unmarried "girlfriend", "boyfriend" or even a friend splitting rent is part of a household for bankruptcy purposes where there is no legal relationship between the people involved. In that particular case, I think the debtor includes at least his child as part of the household, but I am not sure if the girlfriend is part of a household for bankruptcy purposes. I am not aware of any court decision defining the limits or definitions of "household" for purposes of the means test. There probably are some cases which have discussed the topic, and I would appreciate a reference if any reader is aware of case law on this issue.

Mortgage Deficiency Judgments: How Real Is The Risk?

Many callers and clients are concerned with deficiency judgments from foreclosures on investment properties. Some bankruptcy attorneys I’ve spoken with state their business is increasing largely because of their clients’ concern for deficiency judgments. I have written prior blog posts which explained the process mortgage lenders are required to follow to get a deficiency. I had questioned whether borrowers are exaggerating the risk of deficiency judgments. Today I received a call and email from a prospective client who gave me additional first-hand information about the prevalence of personal judgments against borrowers because of mortgage deficiencies.

The prospective bankruptcy client was facing a mortgage foreclosure on an investment property and was concerned about deficiency judgments. The borrower happened to be a clerk at a local courthouse and worked in the section that handled foreclosure suits. I asked the person to check with the civil clerk who handled mortgage deficiency actions to find out the extent to which lenders are actually pursuing personal money judgments against borrowers for deficiency amounts. The person handling deficiency actions reported that only one or two mortgage lenders have been pursuing any deficiency judgments and that a small percentage of foreclosures also involve deficiency actions. While there is always some risk of deficiency judgments, there is evidence that deficiency judgments are improbable in practice. Many people should wait until after the foreclosure process in complete before filing bankruptcy preemptively to avoid a deficiency action that likely will never occur.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Wall Street Journal: Some Creditors Abuse Bankruptcy System

Saturday’s Wall Street Journal had a short article about debt collectors who try to circumvent bankruptcy of borrowers. These debt collectors do not actively pursue debt collection after people filing bankruptcy as that would be a serious violation of federal bankruptcy law. The article states that some debt collectors intentionally do not remove the debt for credit reports. They find that some debtors eventually pay the debt on their credit reports when they recover financially in order to qualify for large loans, or some debtors pay out of a moral obligation to repay debts. In any event, the article says that creditors can sell debts incurred by their debtors even after the debtors filed bankruptcy because of the significant chance that the debtors will eventually repay the debt voluntarily.

Technically, failure to remove a discharged debt from a credit report is violation of federal law, specifically, the federal fair debt collection laws. The practical problem for debtors is that they have to hire an attorney to bring an action against these debt collectors. The legal action is in federal court and most attorneys are inexperienced in this area of the law. Also, few qualified attorneys will take such work on a contingency fee basis. Debtors probably find it easier to pay the debt when they are able financially. The Journal says that these debt collectors are "gaming the system" by not taking active steps to properly handle discharged bankruptcy debt on credit reports.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Chapter 7 Debtor Uses Investment Mortgage Debts To Pass Means Test

There has been a significant increase in bankruptcies by people facing default in one or more investment real estate mortgages. Many of these bankruptcy debtors are trying to protect themselves from deficiency judgments following foreclosures on investment properties. These debtors usually have household income above median income; their high income enabled them to qualify for several investment mortgages make decent incomes. Absent the debt service for one or more investment mortgages, they would have ample income to pay their ordinary consumer expenses. Many of these cases are raising interesting issues for calculating means test analysis.

These mortgage debtors usually plan to stop paying all their investment property mortgages after filing bankruptcy and allowing the banks to foreclose. Relieved of the debt service of the investment mortgages, these debtors have substantial net monthly income. This creates interesting issues when the debtors calculate their means test analysis. Secured debt requirements help debtors pass the means test. The more secured debt service a debtor has the more likely his net monthly income will justify a Chapter 7 bankruptcy. The question is whether these debtors can include in their means test investment mortgage debt service they plan to stop paying as soon as they file.

I have been calculating means tests including all investment secured debt. The means test asks for secured debt the debtor is contractually obligated to pay when he files bankruptcy. There is not exclusion for debt abandoned after filing. Regardless of the debtors intent to surrender the investment properties there is always the chance they he may sell the properties or change his mind after filing. It seems impractical to wait until the debtor makes up his mind about the mortgage debts and properties after filing. For these reasons, I think the debtor can use all existing investment mortgages to pass the means test even if he intends to keep none of the mortgage debt. I recall a bankruptcy case that reaches the same conclusion but I don’t have the citation.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida