Business owners often proceed with creating their company, forming partnerships, securing loans, and entering the market without considering potential risks. They tend to believe that merely incorporating the business shields them from liability.
Additionally, relying on the assumption that losses are distributed among partners according to the company bylaws, they perceive the risks as proportionate and manageable. While incorporating a business does offer some liability protection, and a well-crafted operating agreement can help mitigate risks, the potential repercussions of a partner filing for personal bankruptcy are frequently underestimated.
Plans for dealing with this situation and managing the business loan-associated debt should be addressed, leading to potential complications for the business in the future.
Personal Bankruptcy When You Have a Business Partner
Having a partner who manages a business can be immensely advantageous for certain small enterprises, as it allows for sharing operational costs.
However, if one of the business partners declares personal bankruptcy, it can potentially entangle the other parties in a complicated situation, jeopardizing both the business partners’ files, assets, and investments.
Upon discovering your partner’s bankruptcy filing, you must adhere to the bankruptcy laws, even if you have not received formal notice. Any business-related actions will require prior court permission to avoid potential fines.
A trustee will be appointed under the bankruptcy code to manage bill payments and asset collection, but their actions will be limited to court recommendations. It is vital to have a capable attorney who can defend your interests during this process. Find someone experienced in handling bankruptcy cases to represent you effectively.
Understanding Responsibilities When a Business Partner Declares Bankruptcy
Establishing a business partnership leads entrepreneurs to overlook the intricate financial implications that arise, particularly when debt becomes a factor. Few consider these consequences while setting up a block or during prosperous times.
However, it is crucial to contemplate the potential ramifications if the business encounters difficulties in the future. In such a scenario, the personal bankruptcy of your partner can significantly impact your business partnership.
The interwoven financial positions expose both partners to risks and potentially jeopardize the stability and success of other partners in the business venture. It is essential for business partners to be aware of this possibility and to have clear agreements and contingency plans in place to mitigate the effects of such a situation.
Engaging a bankruptcy attorney enables safeguarding sufficient assets for your business during your partner’s bankruptcy.
Safeguard Your Assets
Protective measures must be implemented to safeguard your business partnership assets and personal assets. A business partnership is akin to a long-term legal commitment, much like a marriage, tying you to another individual or individuals.
The Implications of Your Business Partner’s Bankruptcy Filing
Once your business partner files for bankruptcy, safeguard your interests. The moment the filing occurs, a legal provision called the ‘automatic stay’ comes into effect, halting all activities related to the business. Everything is frozen in its current state as of the time of filing. The automatic stay is strictly enforced, and any actions that breach it can lead to severe penalties.
To ensure that your rights and interests are adequately protected during this process, seeking the guidance and representation of a qualified business attorney is essential. They will help navigate the situation’s complexities and take the necessary steps to safeguard your position and assets.
Acting swiftly and seeking legal counsel can significantly minimize potential risks and find the best possible outcome for your business during this challenging period.
Buy-sell Agreement
Partnership agreements may include provisions for ending the partnership if a partner files for bankruptcy trustee or personal bankruptcy. Personal bankruptcy can negatively affect the business, and planning such events is crucial. It is essential to clarify how personal and business debts will be treated in case of a partner’s bankruptcy in the partnership agreement.
When your business partner declares bankruptcy, her 50% ownership in the company is regarded as an asset within the bankruptcy estate. However, selling a 50% equity stake in a privately held company can be challenging since there is typically only a readily available market for a considerable company.
As a result, the most logical buyer for this stake is often you, the other partner. This situation presents a favorable opportunity to buy out your partner’s share at a reasonable cost, allowing for a clean and efficient exit from the business for them.
Reach out to aBankruptcy Attorney for the help you need to create this agreement.
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Bankruptcy is a way for honest people struggling with debt to get relief and a fresh start. It’s meant to help individuals facing challenging situations like losing a job, having big medical bills, divorcing, or dealing with a disability.
But sadly, some dishonest people misuse the bankruptcy system. They might have enough money to pay back their debts, but they try to get away with not paying by filing for bankruptcy. They might even use bankruptcy to hide their illegal activities, like scams or fraud, and keep the authorities from catching them.
The FBI and the Department of Justice are the agencies that investigate these kinds of fraud cases in bankruptcy. Even though they have other financial crime cases they oversee, they take bankruptcy fraud seriously. They focus on cases involving money, connections to organized crime, or when suspects file for bankruptcy in multiple states.
Civil and Criminal Bankruptcy Fraud
Bankruptcy fraud can take on different forms, and some of the most common types involve dishonest actions during the bankruptcy process.
Civil cases arise when a creditor files a lawsuit (adversary proceeding) for wrongdoing involving a specific debt. Consequences may include case dismissal, denial of debt discharge, or other sanctions.
Criminal bankruptcy fraud involves significant schemes to cheat multiple creditors and is investigated by the FBI and prosecuted by the DOJ. While most cases focus on debtor activities, creditors, trustees, court personnel, and third parties can also face charges for bankruptcy crimes.
Here are some examples:
Providing False Information
People may lie under oath or give false information during their bankruptcy proceedings. This could be about their income, assets, debts, or other important financial details. Providing false documentation is also a common way people try to deceive the bankruptcy court.
Concealing or Transferring Assets
Some individuals might hide their valuable assets so the court and creditors don’t know about them. They might transfer assets to family members or friends to keep them safe during bankruptcy.
Tax Fraud
Bankruptcy fraud may involve tax-related offenses, such as not reporting all of one’s income or claiming false deductions to lower the amount owed to creditors.
Multiple Bankruptcy Filings
Some fraudsters might use fake identities or aliases to file for bankruptcy multiple times in different places. This allows them to take advantage of the system and avoid paying their debts.
Bribing a Bankruptcy Trustee
In some cases, corrupt individuals may try to bribe a bankruptcy trustee to gain favor or get an unfair advantage during the bankruptcy process.
“Credit Card Bust-Outs”
This type of fraud involves running up credit card bills without the intention of ever paying them off. People rack up massive debt and then file for bankruptcy to get out of paying what they owe.
Bankruptcy fraud can also be linked to other crimes like credit card fraud, identity theft, mortgage fraud, money laundering, mail and wire fraud, and more. Sometimes, individuals simultaneously engage in multiple illegal activities, making the investigations more complex.
Federal Law And Bankruptcy Court
When considering bankruptcy, seek advice from abankruptcy attorney to ensure compliance with federal law and avoid bankruptcy fraud.
An attorney can guide you through the process and help you make informed decisions while ensuring honesty and transparency in your filings.
18 U.S.C. § 157 Bankruptcy Fraud Case Examples
Let’s break down the situation in one example:
Jorge Droz Yapur is in big trouble because he’s accused of being involved in a “bankruptcy fraud scheme.” This means he allegedly made false statements related to his bankruptcy case. As part of his bankruptcy process, he tried to deceive his creditors, the people, or the companies he owed money.
Specifically, Jorge Droz Yapur faces nine charges of “concealment of assets” during his bankruptcy proceedings. This means he allegedly hid some of his money and income so it wouldn’t be discovered during the bankruptcy process.
He’s also facing eight charges of “making false statements” during the same bankruptcy proceedings. This means that he’s accused of lying under oath while giving testimony in court or providing information that wasn’t true.
One of the things he did was use a bank account that was in his adult son’s name to hide some of his money and assets. This way, it wouldn’t be traced back to him during the bankruptcy process.
Another serious accusation is that he testified under oath that his mother was alive and living in an elderly home. But in reality, she passed away.
He could face up to five years imprisonment for each violation if he’s guilty of all charges. He might have to pay a fine of $250,000. After serving his sentence, he’d have to report to authorities regularly.
Now let’s break down what happened with Yamil Fonseca Salgado:
Yamil Fonseca Salgado is in serious trouble because he’s accused of being involved in a “bankruptcy fraud scheme.” During several bankruptcy cases, he allegedly made false statements and lied about essential things. He did this to cheat his minor child out of the child support payments.
On top of that, he’s facing other charges. One of them is “willful failure to pay” child support. He allegedly didn’t pay about $107,200 in child support.
Another set of charges is related to “false statements” during his bankruptcy proceedings. This means he’s accused of lying or providing incorrect information while dealing with his bankruptcy cases.
According to the indictment, Yamil Fonseca Salgado tried to hide several things in his bankruptcy filings. He concealed assets, which meant he kept valuable things secret so that no one would know he had them. He also hid his income and connection to a maintenance company called CMM Janitorial, Inc.
In addition to that, he allegedly didn’t mention that he received money transfers through a payment system called ATH Móvil. These transfers came from the bank account of a construction company controlled by his close family members. This construction company, in turn, received money from the public housing management company where Yamil Fonseca Salgado worked.
Another thing he’s accused of is using and controlling a bank account at Banco Popular de Puerto Rico. But the account was in his grandmother’s name, and he used it to access funds for his expenses.
The consequences could be severe if he’s guilty of all these charges. He could face up to two years of imprisonment for the “willful failure to pay” child support. For each violation of 18 U.S.C. § 157 and § 152, he could be sentenced to five years in prison for each violation. Also, he might have to pay a fine of $250,000, which is a substantial amount. After serving his sentence, he could be under supervised release for three years, so he’d have to report to certain authorities regularly.
These charges are severe, and if Yamil Fonseca Salgado is convicted, he could face significant consequences for his actions. The legal system takes these cases seriously to uphold justice, protect those owed child support payments, and ensure honesty during bankruptcy proceedings.
When facing financial difficulties, individuals in distress may view their retirement accounts as a convenient source of funds, using retirement money and hoping it can spare them from resorting to Chapter 7 or Chapter 13 bankruptcy filings to regain control over their debts.
Retirement accounts typically enjoy protection in bankruptcy, safeguarding them from being utilized to settle outstanding debts.
Nevertheless, it’s important to note that certain accounts have exemption limits, and withdrawing money from retirement funds before filing for bankruptcy can have potential ramifications.
Exemption Limits for IRAs (Individual Retirement Funds)
Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both Traditional and Roth IRAs are protected, subject to a limit of $1,512,350 per person.
This limit applies to the total value of all IRA accounts combined rather than to each account. If the combined value of your IRAs exceeds the allowed amount, the surplus may be utilized to repay your creditors.
When Does The IRA Exemption Limit Change?
The exemption limit is adjusted every three years to account for the cost of living, with the subsequent adjustment scheduled for 2025.
ERISA-Qualified Retirement Plans: Understanding Their Protection in Bankruptcy
ERISA-qualified retirement accounts are protected and offer robust protection in bankruptcy proceedings.
According to federal law, these retirement plans are not considered part of the bankruptcy estate and cannot be seized by the appointed bankruptcy trustee.
Whether you file for Chapter 7 or Chapter 13 for bankruptcy protection, your ERISA-qualified retirement funds are not at risk of being lost.
What Are ERISA Plans?
If you’re unfamiliar with ERISA-qualified plan plans, they are defined benefit plans established by employers, adhere to specific IRS guidelines, and enjoy tax-exempt status.
Some examples of ERISA-qualified retirement plans include 401(k)s, 403(b) or profit-sharing plans, 457(b) deferred compensation plans, governmental plans, and tax-exempt organizational retirement plans.
An additional advantage of ERISA plans is that, under federal law, there is no limit to retirement age or the amount of protection they repay creditors. Your retirement assets in these plans are safeguarded from creditors, offering you peace of mind.
If you’re unsure whether your retirement plan falls under the category of an ERISA-qualified account, it’s advisable to consult with your employer for clarification.
Protecting Your Retirement Account When Filing Bankruptcy: What You Need to Know
Withdrawals from tax-deferred retirement accounts are subject to regular income taxation.
Additionally, if you are younger than 59½ years old, you may be liable for a 10% early withdrawal penalty.
Moreover, once you withdraw funds from your retirement account, they are no longer safeguarded in a bankruptcy proceeding.
Chapter 7 or Chapter 13?
This could affect your eligibility for Chapter 7 bankruptcy through the means test or inflate your income in Chapter 13 bankruptcy.
Before pursuing this route of filing for bankruptcy, it is essential to determine whether filing for bankruptcy is the most suitable course of action for your family member and specific circumstances.
Consult With A Bankruptcy Lawyer
It is highly advisable to consult with a bankruptcy attorney in your local area before filing for bankruptcy. They possess the expertise to guide you through the complex federal, state, and local bankruptcy law and other federal laws and regulations, ensuring the optimal protection of your retirement assets.
They can also assist in adequately reporting your retirement income, including Social Security benefits. Furthermore, an expertbankruptcy attorney can help you explore alternatives to bankruptcy if applicable.
Taking money out of your pension or retirement account to address debt may initially seem like a viable option to mitigate the impact of bankruptcy. However, it is crucial to thoroughly explore your options with an attorney before making any decisions.
Protecting IRA Balances During Bankruptcy
Substantial exemptions are in place to safeguard IRAs in bankruptcy cases. Federal bankruptcy exemptions offer protection for IRA savings up to a limit of $1,512,350. This amount is periodically adjusted every three years.
When an individual possesses multiple IRAs, the exemption limit applies to the combined value of all the accounts rather than each account.
What Happens To My IRA If I Am Married?
When married individuals file for bankruptcy jointly, both spouses can claim the total exemption amount individually. The exemption applies equally to traditional IRAs, Roth IRAs, and other investment accounts.
Individual Retirement Accounts (IRAs) differ from 401(k) plans in that they are established and managed by individuals rather than employers.
Unlike ERISA-qualified plans, IRAs are not obligated to adhere to ERISA regulations, which means they do not enjoy the same unlimited federal bankruptcy exemption. However, there are exceptions to this rule.
Certain IRAs, such as Simple IRAs, may qualify for ERISA protections. Additionally, if you roll over an ERISA-qualified account, such as a 401(k), into an IRA, the account may still be eligible for the ERISA exemption in the context of bankruptcy.
Withdrawn Retirement Benefits
When it comes to retirement savings accounts, like an IRA, they are typically protected in the bankruptcy code. However, if you decide to withdraw money from your retirement account and put it into your regular checking account, those funds lose their protected status.
If you deposit the funds into a separate account, they are generally protected but still not considered exempt from bankruptcy.
It’s important to note that this rule is different regarding Social Security retirement benefits. Social Security income remains exempt if you keep it in a separate account.
This is because you can choose when and whether to withdraw funds with a retirement savings account.
What Do I Do With My Social Security Payments?
In contrast, Social Security payments are automatically deposited into your account by the government each month, and they maintain their exempt status as long as they are kept in a separate account.
So, while retirement savings accounts can lose their exemption if you withdraw funds, Social Security benefits are typically protected as long as they are kept separate from bank accounts in monthly payments.
In conclusion
When contemplating bankruptcy, it is crucial to comprehend its comprehensive impact on your financial situation, particularly regarding your retirement savings.
While existing retirement funds are generally shielded from bankruptcy, it’s essential to be aware of certain limitations and exceptions.
The specific type of bankruptcy you file for and your employer’s policies regarding bankruptcy filing can also influence your ability to make additional contributions to your retirement plan during the bankruptcy proceedings.
Consider these factors with a bankruptcy attorney that will help you understand how they may affect your retirement savings.
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Within the realm of bankruptcy, taxes are generally classified as “nondischargeable priority debt.” It indicates that bankruptcy cannot eliminate tax debts, and the repayment of such obligations is prioritized over the claims of other creditors.
Nevertheless, there are situations where taxes can be categorized as “dischargeable debt,” meaning they can be eliminated by filing for bankruptcy.
When You Can Discharge Tax Debt
For tax debt to be considered dischargeable, it must meet specific criteria.
Firstly, it should pertain to income taxes, encompassing outstanding federal and state income tax obligations. However, it does not contain other back taxes, such as past-due payroll taxes related to Social Security and Medicare withholding.
Secondly, the tax debt must be of a different origin, typically within three years. The original tax return should have been due at least three years before the date of filing for bankruptcy.
For tax debt to be eligible for discharge in bankruptcy, it is necessary to have filed a valid tax return and for that tax return to have been assessed by the IRS at least Three (3) years before initiating the bankruptcy filing. Furthermore, the tax return must have been submitted within the prescribed deadline.
If an extension in filing taxes was requested and granted, filing the return by the extended due date is considered “on time.” However, suppose the return was filed after the extended deadline. In that case, it might be deemed invalid, resulting in the tax debt being ineligible for discharge since the assessment date will have been extended through the extension obtained.
Apart from the regulations concerning the debt age and the tax return timing, there is an additional prerequisite for tax debt to be considered eligible for discharge.
Specifically, the Internal Revenue Service (IRS) must have officially assessed the debt, meaning it has been recorded on the agency’s books at least three years before the initiation of the bankruptcy filing.
This requirement can also be fulfilled if the IRS still needs to assess the debt at the time of the bankruptcy filing.
One crucial factor to consider is ensuring that the taxing authority, typically the IRS, has not placed a tax lien on your assets. If a tax lien has been filed, a bankruptcy filing will not remove or lift the lien.
This scenario represents one of the most prevalent obstacles in seeking tax relief through bankruptcy, thus demanding special attention and careful consideration.
Bankruptcy cannot protect you if you have engaged in tax evasion or submitted a fraudulent tax return. The rules stipulate that tax returns must have been filed honestly to be considered for discharge in bankruptcy.
Moreover, various court jurisdictions may have additional criteria for eliminating tax debt through bankruptcy courts. While we have covered the primary conditions, you must familiarize yourself with local rules that may impose further requirements.
Federal Tax Liens and Bankruptcy
Distinctions exist between a tax debt and a tax lien. Tax debt refers to the money owed to the taxing authorities, while a tax lien is a legal encumbrance placed on your property to enforce the tax liability. This lien can encompass all your financial assets, including bank accounts, personal belongings, and real estate.
You Can’t Discharge Federal Tax Lien
Bankruptcy does not discharge a tax lien. Even if bankruptcy successfully discharges your tax debt, the IRS or other taxing authority will still maintain a legal claim to your property due to the existence of the tax lien.
Upon filing for bankruptcy, the IRS is prohibited from pursuing collection efforts on a tax debt that has been discharged. This holds even if a tax lien has been established.
As a result, the IRS cannot access your bank account or initiate wage garnishment to collect the discharged tax debt.
You can also continue residing in a home with a tax lien attached. However, it is essential to remember that when you eventually sell the house, the proceeds from the sale will need to be used to satisfy the outstanding tax lien. At that point, the tax lien must be paid off using the profits generated from the sale transaction.
Optimal Bankruptcy Options for Resolving Tax Debt
Tax debt has the potential to be discharged through various options provided by the federal bankruptcy code. Individuals can seek protection and relief by filing for bankruptcy under different chapters, including Chapter 7 and Chapter 13.
Chapter 12 is specifically designed for family farms and fishing operations, while Chapter 11 primarily addresses businesses and more significant debts.
These different bankruptcy chapters offer individuals and entities a range of options to address their tax debt and seek the necessary relief.
Addressing Tax Debt through Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy filing, the debtor’s nonexempt assets will be subject to sale/liquidation by the Chapter 7 Trustee, with the proceeds distributed among the creditors. If limited or no assets are available to satisfy the creditors, eligible debts are discharged through Chapter 7, resulting in creditors receiving no payment.
According to the IRS, tax debts can be eliminated through Chapter 7 if they meet specific criteria, including being at least three years old and the taxpayer having filed returns for the past four tax periods.
Resolving Tax Debt with Chapter 13 Bankruptcy
According to the Internal Revenue Service (IRS), Chapter 13 bankruptcy is the predominant form of individual bankruptcy used to address tax debt.
Chapter 13, known as reorganization bankruptcy, involves creating a structured repayment plan with creditors to settle outstanding debts over three to five years gradually.
In contrast, Chapter 7 bankruptcy eliminates a significant portion of debts, rendering them no longer required to pay creditors or to be repaid.
Under a successful Chapter 13 filing, tax debts are paid off through the reorganization plan, and tax debts over three years old at the time of filing can be discharged.
The taxpayer must fulfill certain obligations during the repayment period, including filing tax returns promptly and promptly using tax refunds and paying any newly incurred income taxes.
In specific circumstances, a Chapter 13 filing may also result in the discharge of interest and penalties associated with the tax debt. Furthermore, interest on discharged tax debts will be erased, while penalties can be discharged if they exceed a three-year threshold.
When Should I Consider Filing for Bankruptcy: Before or After Taxes?
There is no significant advantage in delaying your income tax return until after filing for bankruptcy. However, for various reasons, it is essential to be up to date with your state income taxes, even when filing for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy Filing and Tax Returns
When filing for Chapter 7 bankruptcy, the assigned trustee will request your last two years of most recent tax returns. It doesn’t have to be the return from the previous tax year, but if it isn’t, you’ll need to provide a written explanation.
The trustee will compare the income you reported on your tax return with the information in your bankruptcy paperwork. If you’re expecting a tax refund, the trustee will verify if you can protect or “exempt” it and if the claimed exemption amount is correct. Otherwise, you’ll be required to surrender the refund to the bankruptcy trustee, who will distribute it among your creditors.
Many individuals intend to use the tax refund for essential expenses before filing for bankruptcy. If you opt to file for bankruptcy using this strategy, it’s crucial to maintain records of your expenditures.
Chapter 13 Bankruptcy Filing and Tax Returns
Before filing a Chapter 13 case, it is crucial to have your tax returns up to date, although there is some flexibility within the rules. You must submit copies of the previous two to four years’ tax returns to the Chapter 13 trustee before the 341 meeting of creditors, a mandatory hearing for all filers.
If you are not required to file a return, the trustee may request a letter, affidavit, or certification explaining the reason. Sometimes, local courts may have additional document requirements specific to their districts.
Please file a return with the IRS, the state, or the city you reside in before your 341 meeting of creditors to avoid significant drawbacks for your bankruptcy case. Firstly, the trustee overseeing your bankruptcy will initiate a motion, allowing you a limited period to provide your tax returns. Please meet this deadline to avoid the court dismissing your case, depriving you of the opportunity to present your situation before a judge and seek a resolution.
Additionally, if you haven’t filed a return and owe the IRS, they might file a claim based on their own “best estimate” of your income. However, after filing an accurate and proper return, these estimates typically tend to be higher than you would own. Consequently, this can introduce complications and potential issues for your bankruptcy proceedings.
Income Tax Debt And Bankruptcy
Individuals often face various types of debts owed to the IRS, with unpaid income taxes being the most prevalent form.
The presence of looming unpaid tax debt can induce considerable stress, compounded by the fact that the IRS is known for its assertive efforts to collect such debts. As a prominent public entity, the IRS is the most significant debt collector worldwide, equipped with tools and capabilities that private debt collectors can only aspire to possess.
In Chapter 7 or 13 bankruptcy filings, income tax debt (subject to certain limitations) is the only type of tax debt that can be discharged. However, Chapter 13 offers the option to repay tax debts throughout previous bankruptcy filing through a structured repayment plan, typically spanning three to five years.
Does Bankruptcy Clear Tax Debts?
Achieving debt relief through bankruptcy requires careful consideration of timing and strategic planning, notably when eliminating tax debt. One crucial aspect of a successful bankruptcy filing is waiting until the tax debt has surpassed the three-year mark before seeking assistance from a bankruptcy court.
Gaining insights into your tax and debt repayment timeline is crucial, and to accomplish this, it is advisable to request transcripts of your tax account from the IRS. These transcripts will provide essential dates that will help determine whether it is appropriate to pursue bankruptcy to address your tax debt.
In cases where a tax lien complicates the process of eliminating tax debt through bankruptcy, it is essential to confirm the validity of the lien. Valid liens must accurately identify the taxpayer, specify the tax year for which the debt is owed, and include the correct assessed amount, among other pertinent details. Additionally, the taxing authority must have filed the lien in the appropriate office, which may vary depending on the state.
If a lien is found to be faulty or invalid, it will not impede the bankruptcy process. Reach out to abankruptcy attorney for advice and understanding how to deal with liens.
If Chapter 7 bankruptcy is not a feasible strategy for eliminating tax debt, Chapter 13 may still provide a viable alternative. Under Chapter 13, debtors must make regular payments for three to five years, but it offers opportunities for discharging certain debts, including tax debt.
If bankruptcy turns out to be a bad option, then it is prudent to seek the advice of counsel that seeks a settlement directly with the IRS or the state taxing authority through an offer-in-compromise. This option cannot be sought in bankruptcy. Still, it can provide a reasonable solution allowing you to reduce the overall tax liability while offering you a suitable payment plan and timeline to repay the settled balance.
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