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Imagine your financial life is where you owe a lot of money to different people or companies, and it takes time to manage. You’ve heard about different bankruptcy chapters, which can help you eliminate most of your debts and give you a fresh start.

Suppose you possess a residence, financial account, real estate investment property, or any other valuable possession beyond the nation’s borders. In that case, you must declare these holdings in your bankruptcy application. A foreign representative cannot explain and help you understand the American bankruptcy proceeding.

While the bankruptcy trustee might need more authority to disclose these internationally, such an assumption is, in truth, inaccurate. Certain or potentially all of these valuable resources may be eligible for protection under the Bankruptcy Code, yet their disclosure remains mandatory.

Neglecting or failing to apprise your bankruptcy lawyer of offshore assets during the submission of either Chapter 7 or Chapter 13 bankruptcy is synonymous with concealing wealth. Such behavior may lead to rejecting your bankruptcy claim, potential legal charges, and asset(s) forfeiture.

Revealing Overseas Property in Your Bankruptcy Petition

Bankruptcy submission ought to be a transparent procedure. Despite the ability to safeguard certain assets from liquidation, it is imperative to declare your possessions, irrespective of their geographic whereabouts, openly.

Even though specific foreign asset holdings may be granted exemption status within the bankruptcy framework, it remains obligatory to acknowledge their existence. The act of concealing assets can potentially culminate in the levying of criminal charges, the dismissal of your bankruptcy application, or, in extreme cases, the complete forfeiture of the concerned property.

As an integral aspect of the documentation, the bankruptcy court will scrutinize your financial affairs spanning the preceding ten years you file it. If the investigators unearth fraudulent endeavors, you may be ineligible for bankruptcy discharge benefits.

Unveiling Overseas Property to the Trustee in Bankruptcy

You can’t keep things secret when you decide to go through bankruptcy. You need to tell the people in charge about everything you own or anything you might have a claim to. This includes stuff like your house, car, and all your belongings. You have to list them out on specific forms in your bankruptcy application.

When you ask the government for help to get rid of your debt through bankruptcy, it’s like asking for a big favor. They’ll usually say yes, but in return, they want to ensure you’re not trying to trick them or hide anything. So, they need to know everything about your money and the things you own to check if you’re being honest.

The US Trustee’s Office watches over bankruptcy cases. If they discover you didn’t tell them about an asset, they could stop your bankruptcy case and even bring up criminal charges against you.

The US Trustee’s Office Explained

The U.S. Trustee Program is a national organization with much power regarding bankruptcy. Their main job is to ensure the bankruptcy system is fair and works well for everyone involved – people who owe money (debtors), the people or companies they owe money to (creditors), and the general public.

Here’s how they do it:

Administrative Power

They have the authority and jurisdiction to set rules and guidelines for bankruptcy cases in any part of the country. Think of it as creating a fair playbook for everyone to follow.

Regulatory Power

They oversee and regulate the people and organizations involved in bankruptcy cases, like a bankruptcy creditor and a bankruptcy trustee. This helps ensure that everyone in bankruptcy fraud follows the law.

Litigation/Enforcement Power

If someone does something wrong in a bankruptcy case, like trying to cheat or break the rules, the U.S. Trustee Program can take legal action against them. This helps keep the system honest.

Their ultimate goal is to ensure the bankruptcy process is fair, efficient, and trustworthy. This way, when someone goes through bankruptcy, they can have confidence that things will be done right and that everyone will be treated fairly. It’s all about making the bankruptcy system work well for everyone involved.

Securing Your Global Assets In Bankruptcy Court

Whether you’re a natural-born U.S. citizen with holdings abroad or an immigrant who still possesses international assets overseas, it’s prudent to consider enlisting the services of a bankruptcy attorney. They have the knowledge and experience necessary to tackle the complexities associated with international property and bankruptcy. Full disclosure remains imperative even if certain global assets or other property are safeguarded during bankruptcy.

A Michigan bankruptcy lawyer can assist you in identifying which assets may qualify for exemption and which may not be exempt. Following a thorough assessment of your circumstances, our bankruptcy attorneys may explore alternative courses of action to bankruptcy. If bankruptcy emerges as the most viable path forward, rest assured that Babi Legal Group will provide expert guidance throughout the appropriate chapter filing procedure.

Managing Your Overseas Bankruptcy Estate

In simpler terms, involving a bankruptcy attorney when you have foreign assets outside the United States and deal with bankruptcy is wise.

A bankruptcy attorney knows the bankruptcy code. He can advise you about the ins and outs of handling international property in bankruptcy. Even if some of the value of your overseas assets is protected, you must tell everyone about them.

The Importance of Michigan Legal Counsel

A bankruptcy lawyer can assess the present estimated worth of the asset. Depending on the nature of the property, they can gauge the potential challenges the bankruptcy trustee might face in establishing connections in a specific foreign country. They can also provide a preliminary estimate of the associated costs.

However, it’s essential to note that the final determination about your bankruptcy estate and foreign assets rests with the bankruptcy trustee. The trustee holds the ultimate authority in deciding whether they will proceed with liquidating an asset not designated as exempt in your bankruptcy documentation.

A Michigan bankruptcy lawyer can help figure out which foreign assets can be liquidated and kept safe and which can’t. They’ll also look at other options besides bankruptcy if that’s possible.

Babi Legal Group will guide you if making a bankruptcy petition is the way to go. You can feel peace if you have a bankruptcy attorney who helps you protect your overseas assets.

So, the bottom line is this: When you’re going through bankruptcy, you have to be completely honest about what you own and how much it’s worth. This helps the government decide how your creditors get paid and how much they get.

Whether you’re doing Chapter 7 bankruptcy or Chapter 13 bankruptcy, it’s the same – you can’t hide stuff, or it could lead to serious trouble.

Imagine you’re driving down a road of financial difficulties and decide to take a detour called “Chapter 7 bankruptcy” to help you get your car payment back on track. This detour has a particular signpost called a “reaffirmation agreement.”

This agreement is like a contract that gives the debtor and your creditors (the people you owe money to) a chance to make you responsible for a debt again, even if the bankruptcy was by law supposed to wipe it away. It’s like giving them a second chance to ask you to pay up.

Benefits of A Reaffirmation Agreement in Chapter 7 Bankruptcy

 

 

Reaffirmation agreements offer a secure path to keeping your collateral, like a car, if you follow the agreement’s rules and make your payments on time. When you stay up-to-date with auto loan payments, the lender cannot take back what you’ve bought.

Reaffirmation may allow you discuss new terms for various secured loans, such as lowering your payments, interest rate, or total payment over time. But remember, the lender doesn’t have to agree to these new terms, and most reaffirmation agreements stick to the same terms as the original deal.

Downsides of A Reaffirmation Agreement

 

 

You’ve got it right! When it comes to reaffirmation agreements, there’s a critical downside you need to be aware of:

Biggest Drawback: The major downside of signing a reaffirmation agreement is that it locks you into debt, meaning you will remain liable on the debt even after you receive your bankruptcy discharge. If you need to catch up on payments for something like your car loan, the lender can take your car back. If you’ve agreed to reaffirm the debt, you’re on the hook for paying any remaining amount owed even after they take it back. If you don’t pay, the lender can take legal action. After they obtain a judgment for not paying the loan back and having a remaining balance, they will begin garnishment actions, which may include taking money from your paycheck or bank account – this is called garnishing.

Here’s why this is a significant concern:

– Long-Term Impact: After a Chapter 7 bankruptcy, you can’t file for another Chapter 7 bankruptcy for eight years. So, if you’ve reaffirmed debt and struggled to pay it off, these collection efforts could affect you for many years, and your only bankruptcy option thereafter would be a chapter 13 reorganization bankruptcy.

– Choose Wisely: You should only agree to reaffirm if you can handle paying off the remaining balance by affording the regular monthly payment on a long term basis. It’s a big decision that affects your financial future.

 

 

While reaffirming a debt might be a way to maintain possession of something like your car, it’s crucial to do so with a clear understanding of your long-term commitment. If there’s any doubt about your ability to pay, considering other options is usually wiser.

 

How Reaffirmation Agreements Work: A Step-by-Step Guide

 

 

If you’re thinking about sticking with debt after filing bankruptcy again, here’s how reaffirmation agreements play out in bankruptcy cases:

1. Eligibility and Equity: You can only consider a reaffirmation agreement if you’re up to date on your mortgage and car payments and the value of your car (minus what you owe on it) is protected by specific rules called exemptions. These rules vary depending on where you live. Remember, the mortgage and car’s value minus what you owe is called equity.
2. Voluntary Choice: Nobody can force you into a reaffirmation agreement. It’s your decision, and you remain responsible for it.
3. Let the Court Know: Tell the court about your wish to reaffirm a debt. You do this on a form called the “Statement of Intention.”
4. Contact the Lender: Mail a copy of your “Statement of Intention” to your lender. Ask them to create a reaffirmation agreement and send it to you.
5. Read and Sign: When you get the agreement from the lender, read it carefully to make sure the terms are accurate. If it looks good to you, sign it. Ensure you provide any necessary information on-time payments to show that you can continue making payments.
6. Timely Submission: Return the signed agreement to the lender within 45 days of your first creditor meeting with creditors.
7. Court Approval: The lender’s bankruptcy lawyer will submit the agreement to the bankruptcy court. The court will then decide if it willapprove it. They consider whether you can afford to keep paying the loan if the debt exceeds the car’s value or the interest rate is too high.
8. Financial Review: The court reviews your post-bankruptcy budget (in Schedules I and J) to ensure you can easily handle the loan payments. If not, they might reject the agreement. Their main concern is your financial security, interest, and well-being.

Remember, bankruptcy is a fresh start. If the court thinks sticking with the debt isn’t the best idea for your financial health, they might refuse the reaffirmation. But even if that happens, you’ll still have a car. The bankruptcy judge may find it better to return the vehicle and buy one that fits your new budget.

Differences Between Secured And  Unsecured Debt

 

 

Secured Debts: These are loans where you offer something valuable (like a car or a house) as a promise to the lender that you’ll repay the borrowed money. This helpful thing you offer is called collateral. If you can’t repay the loan, the lender can take that collateral to compensate for the lost money. Because they have this security, these loans are considered safer for lenders, so the risk of you not paying is lower.

Unsecured Debts: With these loans, there’s no specific thing you promise to give the lender if you can’t pay. Credit card debt and medical bills are common examples. Since the lender doesn’t have a guarantee like collateral, these loans are considered riskier. If you pay, the creditor can directly take back something valuable from you.

Remember, when dealing with secured debts, the lender has something to fall back on if you can’t pay. Unsecured debts rely more on your promise to repay and your credit history. A bankruptcy attorney’s help can make a difference in your specific case.

A bankruptcy attorney knows how to protect your assets and can help you navigate the different bankruptcy chapters to decide what bankruptcy works best for you.

Before You Go To Bankruptcy Court

 

 

If you’re interested in a reaffirmation agreement, here’s how you go about it:

Timing is Key

You need to express your interest in a reaffirmation agreement after you’ve filed for bankruptcy but before the lender’s claim on the collateral of secured debt (like your car) is canceled. This usually happens when the bankruptcy process is still ongoing.

File a Statement

You start by submitting a “Statement of Intent” to the court. This tells the court and creditors you want to reaffirm a specific debt.

Notify the Lender

You may also send a copy of this “Statement of Intent” to the lender. This lets them know you’re considering a reaffirmation agreement. Most lenders after receiving the notice of intent will reach out to your attorney providing the required reaffirmation agreement.

Legal Help

Working with a bankruptcy lawyer is often a good idea. They can help you review and negotiate the reaffirmation agreement terms. They know the legal ins and outs to ensure your best interests are considered.

Review by the Judge

Sometimes, there might be a reaffirmation hearing where the judge looks at the agreement. This ensures that both you and the lender are being treated fairly. The same judge reviews and ensures it’s a good deal for both parties.

Signing and Filing

Once you and the lender have agreed on the terms and conditions, you put your signatures on the reaffirmation agreement documents. Then, the agreement is submitted to the court. This makes the agreement official and legally binding.

 

 

Remember, seeking professional advice and guidance from a bankruptcy lawyer can help you navigate this process smoothly and make decisions in your best interest.

Keeping Your Car After Bankruptcy

 

 

When you originally got a loan for your car, you made a deal with the lender. This deal included a set monthly payment and specific rules to follow. A reaffirmation agreement is like a promise you make to the lender during a bankruptcy case. It says you’ll stick to the original deal and keep paying off the car loan, even while going through bankruptcy. In return, you’re allowed to keep the car.

Some lenders might ask you to sign a reaffirmation agreement to keep the car after filing for bankruptcy. Others might let you own the vehicle if you make payments, even if you don’t sign this agreement.

 

 

Lenders have a say in what you do with the car because car loans are called secured debts. This means the car guarantees to repay the loan, and the loan gives the lender certain rights over the vehicle. They can take back the car legally if you don’t follow the loan rules. Whether you sign a reaffirmation agreement, you must pay off the loan to keep the vehicle. This rule applies even after you’ve filed for bankruptcy.

 

In conclusion, a reaffirmation agreement is a significant decision in bankruptcy, offering a chance to keep assets while committing to debt relief. Balancing the benefits of asset retention against the potential long-term obligations is crucial, making expert advice a valuable resource in navigating this complex terrain.

Declaring bankruptcy erases certain debts, so you don’t have to repay them. However, if someone else, like a cosigner or joint account holder, co-signed or is responsible for the debt with you, they still have to pay it not to be considered in default. Here’s what happens:

• If you file for Chapter 7 bankruptcy, the creditor can still collect from the cosigner.
• If you file for Chapter 13 bankruptcy, the creditor must pause their collection actions to comply with the Co-Debtor Stay.
• You can protect the cosigner by paying off the debt alone.

What Is A Cosigner?

 

 

A cosigner is a person who agrees to take responsibility for repaying a loan if the primary borrower is unable to do so. Lenders may ask for a cosigner when the primary borrower has a limited or poor credit history or low income. Having a cosigner improves the chances of the loan being approved because the cosigner is considered creditworthy and can be pursued by the lender if the principal borrower defaults on monthly payments.

 

 

Cosigners and guarantors are similar but have some differences. Creditors can try to collect from both cosigners and primary borrowers at the same time if there’s a loan default. However, with guarantors, creditors must first attempt to collect from the primary borrower before going after the guarantor. In the case of bankruptcy, both cosigners and guarantors are treated the same way, as they both become personally liable for the debt.

Will Bankruptcy Affect Joint Accounts?

 

 

Cosigners and guarantors are similar but have some differences. Creditors can try to collect from both cosigners and primary borrowers at the same time if there’s a loan default. However, with guarantors, creditors must first attempt to collect from the primary borrower before going after the guarantor. In the case of bankruptcy, both cosigners and guarantors are treated the same way, as they both become personally liable for the debt.

Will Bankruptcy Affect Joint Accounts?

 

 

Under Chapter 7 bankruptcy, the automatic stay, the legal protection that prevents creditors from pursuing collection actions against the debtor, does not extend to cosigners and guarantors.

When the debtor files for Chapter 7 bankruptcy, creditors can pursue collection action against the cosigner or guarantor for repayment as if the debtor had defaulted on the loan. This means the cosigner or guarantor may be held responsible for the debt and may face collection actions from the creditors. Cosigners and guarantors must know this risk when agreeing to cosign or guarantee a loan for someone else. The debtor filing for bankruptcy should notify the cosigner or guarantor of the bankruptcy at the time of bankruptcy filing.

Safeguarding Cosigners and Joint Account Holders Post Chapter 7 Bankruptcy

 

 

If you want to keep certain assets, like a car, you can agree to remain responsible for the debt by signing a reaffirmation agreement with the lender while you are in bankruptcy. But think carefully because you won’t benefit from the loan payments after the bankruptcy discharge.

Even after bankruptcy, you can choose to keep paying your debts voluntarily. By doing so, you can ensure your cosigners and joint account holders pay debts and won’t face negative consequences. 

The Impact of Bankruptcy Chapter 13 on Cosigners and Guarantors

 

Chapter 13 bankruptcy protects your cosigners and guarantors, giving you more time to repay the debt you owe jointly. During Chapter 13, the automatic stay prevents creditors from collecting on consumer debts, safeguarding personal loans to your cosigners and guarantors (called the Chapter 13 codebtor stay).

However, creditors can ask the court to lift the automatic stay under certain conditions:

• If your cosigner or guarantor benefited from the creditor’s claim.
• If you are not planning to pay the debt in full through your Chapter 13 repayment plan.
• The creditor will suffer significant financial harm if the stay remains in place.

Protecting Cosigners and Joint Account Holders After Chapter 13 Bankruptcy

Chapter 13 bankruptcy differs from Chapter 7 because it can safeguard cosigners and joint account holders if you fully repay the debt in your Chapter 13 repayment plan. When you file for Chapter 13, a codebtor stay protects cosigners and joint account holders from creditors trying to collect on consumer debts.

However, creditors can request the court’s permission to lift the stay under specific circumstances:

• If the cosigner or joint account holder benefited the most from the loan, such as driving the purchased car.
• If your Chapter 13 plan needs to pay the cosigned debt fully.
• If the creditor would suffer severe harm if the codebtor stay continues.

Your cosigner will likely be protected if you plan to pay off the debt, like a car loan. But if some debts get paid less than usual in Chapter 13, creditors might object to your plan if it prioritizes paying the cosigned debt more and other obligations less.

Additionally, the codebtor stay ends if the court dismisses your case or converts it from Chapter 13 to Chapter 7 for bankruptcy protection.

Whether you are considering Chapter 7 or Chapter 13 bankruptcy, seeking professional legal counsel can help you navigate bankruptcy more effectively and protect your interests. Find a bankruptcy attorney right here.

Car Loan Options and Their Impact on Primary Borrower And Cosigners

 

 

If the debt you owe is typically paid back in full through your bankruptcy plan, like a car loan with only a few payments left, your cosigner would probably be protected.

This is because all creditors would still receive the same amount they were supposed to get, ensuring your cosigner loan account is safe from additional liability.

When you have a co-signer for your car loan and file for bankruptcy, there are three options you can choose to file bankruptcy:

 

 

Keep the Car and Reaffirm the Loan

If you reaffirm the car loan, you’ll still be responsible for the debt even after bankruptcy. If you miss payments, both you and your co-signer can be pursued for the remaining balance of the auto loan even after the car is repossessed

 

 

Keep the Car and Redeem it with a New Loan

Redeeming the car means paying the current value to the lender for a clear title. Your co-signer remains responsible for the car loans remaining loan balance, and if you stop paying, their credit may be affected.

Surrender the Car and Discharge the Debt

If you surrender the car in a bankruptcy filing, your obligation to pay the loan is discharged. However, your co-signer will still need to pay off the car loan, and they can keep the car if they continue making payments, regardless of who possesses the vehicle during the bankruptcy case.

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 a bankruptcy 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.

Bankruptcy And Tax Debt

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 a bankruptcy 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.