Am I Required to File Tax Form 941 Before Filing Bankruptcy?

April 15 Tax DayIf you own a business or owned a business in the past and had employees, you were most likely required to file IRS Form 941 on a quarterly basis or IRS Form 944 on an annual basis.  Form 941 is the quarterly report reflecting the taxes you withheld from your employees’ payroll checks as well as the employer portion owed the federal government for Social Security and Medicare taxes.  In many cases, small employers pay their payroll tax liability at the same time they file the 941s.  You can obtain an understanding of the IRS guidelines for filing Forms 941 and 944 on the IRS website, www.IRS.gov.   You can type the term “Form 941” or “Form 944” in the search box to access the instructions.

This blog is not intended to provide instructions on when and how to complete the tax forms, rather the impact of not filing these returns may have on your bankruptcy.  Depending on how the company is legally organized will impact your personal responsibility.  If you are a sole proprietor, single-member LLC or 100% owner of the corporation, you are mostly likely personally responsible for the taxes.  Even if the business entity is no longer doing business or has even been dissolved with the state, you are responsible for the payment of these taxes.

If you file Chapter 13 bankruptcy, you will need to have your tax returns including 941s or 944s filed with the Internal Revenue Service.  At your meeting of creditors some bankruptcy districts require you to sign an affidavit stating you have filed your tax returns, inclusive of 941s or 944s, for the past four years.  If you are unable to sign this affidavit, your case will not be recommended for approval or confirmation and will most likely be dismissed.  If you sign the affidavit, not realizing it applies to 941s as well as your other tax returns, you will be met with a surprise.  The Internal Revenue Service may file a motion to have your bankruptcy case dismissed.  They may also estimate your tax liability and file a proof of claim in your bankruptcy for the amount they have estimated you owe.  This claim will most likely be greater than your actual tax liability, sometimes much great.  As a result, your bankruptcy may not appear viable if you cannot afford to make the Chapter 13 bankruptcy payments including the liability estimated for the payroll taxes owed.

As a result, it is extremely important to file the 941 reports as soon as you anticipate you will file bankruptcy.  The taxes owed for the employee payroll taxes and reported on the 941s can be added into your monthly bankruptcy payments.  As a result, you should be able to resolve any payroll tax liability to the IRS within your bankruptcy.

How Are My Creditors Paid in a Chapter 13 Bankruptcy?

As many are aware, a Chapter 13 bankruptcy is known as a repayment plan to the court for the next three to five years. Whereas many would think that everyone in the bankruptcy receives an equal chunk of the payment; that is not the case.   Previously in a Chapter 13 bankruptcy, you would have made a payment to the court then paid your own mortgage yourself.  The court no longer does that, the bankruptcy Trustee will now include your mortgage in the plan payment and pay those each month.

Your creditors’ claims (who all have come forth with documentation that you owe them money) get paid out into tiers starting with your mortgage payment. Here is an example of the typical tiered repayment:

Conduit payments (these are your mortgage payments)

Administrative fees: these are your fees that the Trustee takes and a portion of attorneys fees if you still have a balance with your attorney, along with any additional attorneys fees in which you have incurred during the duration of your plan.

Mortgage arrears: everything (100%) that you were behind from the time that you filed.

Vehicle payments

Priority claims: these are taxes, alimony and child support you are behind on.

Unsecured claims: these are credit cards, medical bills, etc. Usually, you’re only paying back a percentage of unsecured debt.

Bills in Mailbox

When you miss a payment, you are not only behind with the court, but will in turn be behind on your mortgage as well.  Each time this occurs, you will be brought upon a hearing (such as a Motion to Dismiss or Motion for Relief from Stay), and you will need representation from your attorney and there are usually fees involved. Making your payments in a timely fashion and in the full amount is essential to a smooth bankruptcy. You have to always keep in mind that when you do not pay, your bankruptcy Trustee has no money to send out to your creditors and will usually try to dismiss your case.

What is Cross Collateralization in Bankruptcy?

Cross collateralization is a clause in a purchase contract that secures a loan which serves as collateral for all other loans made with the borrower in the past, present, and future. This type of loan is usually found at credit unions, but can sometimes be found at  your typical banks.

Cross collateralization most commonly occurs with car loans. When you buy a vehicle from a bank or credit union you usually sign a security agreement that secures your car to the loan. This results in the lender holding the title to your car until you pay off the loan. If you default on the loan the bank or credit union can repossess your car. Most people are aware of this kind of agreement.

However there may also be a clause in the vehicle loan that ties any unsecured loans to that vehicle too. So if you later open a line of credit, a credit card account, or take out a personal loan from the same lender, those normally unsecured debts now become secured to your vehicle. If you decide to pay off your car loan to take possession of your car title, the credit union or other lending institution may not let you have the title until all your loans owed to them are satisfied. That means you could be paying much more for your car than you owe and probably more than it’s worth.

Writing a Check

This dilemma becomes particularly sticky in bankruptcy, especially if the debtor is trying to file a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy you either have to surrender your vehicle or reaffirm the debt. If you reaffirm the debt and your loan is with a credit union that has secured all other debts to your car you will have to pay those debts back too before you can keep you car. Normally those other debts would have been wiped out as unsecured debt in a Chapter 7. Most people who file bankruptcy don’t have the extra cash to pay of all of their debts.

One solution would be to file a Chapter 13 bankruptcy and repay your debts over a three to five year period. In a Chapter 13 bankruptcy the debtor can use the “cramdown” provision of the bankruptcy code. That allows you to pay the full amount of the value of the car and not all the other debts owed to the lender. The remaining debt is treated as unsecured debt and is discharged in bankruptcy.

Another cross collateralization trap can occur when a debtor has a loan and a checking account at the same lending institution. If he or she becomes past due on the loan the lender may access his or her checking account to pay the loan or freeze the account until it becomes current.

If you find yourself faced with this cross collateralization predicament your best choice may be to consult an experienced bankruptcy attorney who can discuss all the options with you.

CNN Money Lists 7 Best Credit Cards for Bad Credit

Credit CardA recent article on CNN Money’s website features the seven best credit cards for individuals with bad credit.

While bankruptcy can stay on your credit for 7-10 years from the date that you file, it is important that you begin rebuilding your credit much earlier – in fact, it is best to start doing so about a year after your bankruptcy is closed. You must choose your credit rebuilding techniques carefully, though, so that you do not end up with an outrageous interest rate or hundreds (or thousands!) of dollars in hidden fees.

The credit cards that are featured in CNN Money’s article were chosen because of their more reasonable interest rates and annual fees.

The featured credit cards include:

Orchard Bank

Capital One Secured MasterCard

Navy Federal ‘n Rewards Secured Card

Citi Secured MasterCard

Mango Prepaid MasterCard

Capital One Cash Rewards for Newcomers

Open Sky Secured Visa

Click here to read the article for more information about the cards.

 

What is an Adversary Proceeding in Bankruptcy?

You may have heard your bankruptcy attorney mention the threat or possibility of an adversary proceeding. Essentially, an adversary proceeding is a lawsuit usually filed within your bankruptcy while your bankruptcy is active. Sometimes, a bankruptcy case can be reopened after it is closed for the purpose of filing an adversary proceeding. While adversary proceedings are rare, they do occur in some cases.

Creditors who believe that they have a strong basis for an argument that certain debts in your bankruptcy should not be discharged usually file adversary proceedings. In other words, the creditor files a new lawsuit within your bankruptcy, asking for the Judge to determine that certain (or in some cases, all) debts should not be discharged in the bankruptcy.

After the lawsuit is filed, the court holds a hearing for the creditor(s) and the debtor to make arguments as to why the debt(s) should or should not be discharged in the bankruptcy. This hearing is held in a federal courtroom in front of the bankruptcy Judge assigned to your initial bankruptcy case.

Credit Card Debt

The attorney who filed your bankruptcy petition may or may not represent you in the adversary proceeding. You have the choice to hire the attorney who filed your petition or to find a different attorney to represent you in the adversary proceeding. Along the same lines, in most cases your initial bankruptcy attorney has the option to not represent you in the adversary proceeding. The reason for this is that the adversary proceeding is considered to be a new, separate proceeding within your initial bankruptcy case.

If the Judge determines, based on the arguments presented, that the debt(s) at issue should not be discharged in bankruptcy, then you will be responsible for those debts even upon the discharge of your other debts in the bankruptcy.

Your attorney will contact you if an adversary proceeding becomes a possibility in your case. You will need to assist your attorney in preparing for the defense of the adversary proceeding, because you know the facts of your case better than anyone, and the outcome of an adversary proceeding usually depends on the specific facts of the case.

Contact your Charlotte bankruptcy lawyer, Greensboro bankruptcy lawyer or Winston-Salem bankruptcy lawyer for more details about how filing bankruptcy can help you get a fresh financial start.

What Happens If My Bankruptcy Case Is Dismissed?

It’s a very rare situation that a Chapter 7 bankruptcy will get dismissed.  On the other hand, in a Chapter 13 bankruptcy case, getting dismissed (or “kicked out”) from bankruptcy, unfortunately, occurs more often than many people would think.

So Why Could A Case Get Dismissed?

1)   you are untruthful on the bankruptcy petition,

2)   you fail to file the required forms and schedules in the bankruptcy petition,

3)   you fail to pay the assessed fees, such as a filing fee, with the court,

4)  you fail to cooperate with the bankruptcy trustee (chapter 7 or chapter 13 trustee),

5)   you fail to timely make your chapter 13 plan payments,

6)   you are attempting to file a chapter 7 and you fail the “means test”,

7)   you’re in a chapter 11 bankruptcy and fail to make the Chapter 11 plan payments,

8)   you failed to take the required credit counseling course or financial management course, the chapter 7 trustee or the chapter 13 trustee asks the court to dismiss your case on legal grounds.

My Case Was Dismissed, Now What?

Since you likely know why the Chapter 13 case was dismissed, the most common question that occurs is, “What happens now?”

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Your financial situation goes right back to where it was before you started the bankruptcy. Literally.  When you file a bankruptcy, the second that you have a case number you have an automatic stay or protective bankruptcy “stay” against you.  This means that any pending foreclosure, repossession, lawsuit, or debt collection attempts cease immediately.  When you are dismissed from a bankruptcy, your status reverts right back to where it was at the time that you filed the bankruptcy.  If your home was in foreclosure at the time that you filed the bankruptcy, the mortgage company has the right to start procedures right back up again. (And in most cases, they do.) If you were behind in your vehicle, your finance company has the right to resume where they left off and repossess the vehicle.

Not that it’s bad enough that your situation goes to what it was, don’t forget that you filed the bankruptcy in the first place; it will show on your credit, and stay there for the next 7 to 10 years.  Whether you complete your case or not, you still filed a bankruptcy and your credit will reflect doing so.  The good thing about being dismissed (and the only good thing) is that in most cases you can re-file the bankruptcy if needed.  Of course, there are certain provisions and criteria to re-filing which you will need to discuss with your attorney.  Usually, the court will allow you to refile another bankruptcy petition if there was a “harmless error” that caused your case to be dismissed. If you were in a Chapter 13 bankruptcy, there are some limitations as to how many times you can refile a Chapter 13. The bottom line in it all is to make sure that you take the steps necessary to comply with the bankruptcy provisions to ensure that your bankruptcy is smooth sailing.

 

What To Do If You Get A Form 1099C After Filing Bankruptcy

Tax Date CalendarEvery year at tax time we get calls from our clients who say, “I just got a 1099C from a creditor for a loan that was discharged in my bankruptcy! What do I do now? Do I have to report it as taxable income to the IRS?”

When a creditor charges off a debt as uncollectible or has reached a settlement that releases the debtor from further obligations, he must report it to the Internal Revenue Service (IRS) as a business expense if the amount is more than $600.00. He will then send the debtor a 1099C by January 31st which the IRS considers as taxable income to the debtor. Usually, if the debtor has not filed for bankruptcy, he/she must report the discharged debt as taxable income on that tax year’s return even though he/she has not actually received the money.

However, if the debtor has filed for and/or been discharged from bankruptcy, the debtor should not incur any tax consequences for a discharged or settled debt. It is then the creditor’s responsibility to mark the “bankruptcy” box on the 1099C indicating to the IRS that the debtor has no tax liability for the discharged debt. If the creditor does not mark the bankruptcy box, the debtor can submit Form 982 with their income tax return which allows him/her to reduce his taxable income by the amount of the debt that has been discharged and thus releasing him from any income tax liability associated with the debt.

If your debts have been discharged in a bankruptcy proceeding and you receive a 1099C from a creditor you should immediately consult your experienced bankruptcy attorney who can advise you on how to file Form 982 with your income tax return.

How Do I Determine the Value of My Home If I’m Filing Bankruptcy?

The value of your home, from a bankruptcy perspective, is a major concern that you will want to be aware of.  From too much equity to the possibility of “stripping a lien“, the value of your home plays a key part in your bankruptcy.  With the ever fluctuating real estate market, determining the value of your home may seem like a difficult and challenging task.

Family in Front of House

The Bankruptcy Court for the most part will rely on the tax value of your property as recorded by the Tax Assessor in the county which you reside. Many counties now have websites in which you can access detailed information on your property including the assessed value. Unfortunately, tax values don?t always reflect the true value of what your home may be worth.  If you think that the tax value of your property is overstated (or understated for that matter) you can always try a different avenue in determining the value of your home such as a Comparative Market Analysis.

A Comparative Market Analysis, which is also referred to as a CMA, is an analysis done by a real estate agent to establish a home?s market value. It is not an appraisal. The CMA compares homes of similar size, condition, age, and style in the same area or neighborhood that are currently on the market, under contract and that have recently sold. The comparables will in most cases better reflect the actual value of a home. It may seem like a lot of work to obtain a CMA but if it means protecting your home and your equity, in most cases, it?s worth it.

While most real estate agents will provide you with a Comparative Market Analysis of your home at no charge, some real estate agents may charge you if you are not putting your house on the market.

Every Bankruptcy Trustee is different and you will need to discuss your home?s value and what issues may arise around it with your attorney so he or she may give you advice that is tailored to your case.

Is Life Insurance Protected in Bankruptcy?

There are two primary types of life insurance: term life and whole life.  There are many ways these can be structured, e.g. as a universal policy, but for our purposes we will look at the simplified term life insurance and whole life insurance policies.

A term life insurance policy does not mature until someone’s death.  As a result, when you file bankruptcy your term life insurance policy, or a policy that you are the beneficiary of, does not have any value until someone’s death.  If there is no value there is nothing to protect in your bankruptcy.  However, if you are paying premiums for a term life policy, the monthly premium should be listed in your budget.

Picture of Senior Couple

A whole life insurance policy has a “cash surrender value”.   This means after having the policy for a period of time, you can borrow against the proceeds.  Those proceeds could then be used to pay your debts.  Fortunately, as long as the whole life policy has your spouse and/or children as the beneficiaries and you are using North Carolina exemptions, it is protected under the North Carolina Constitution and the North Carolina General Statutes.  The North Carolina Constitution states that life insurance proceeds where the spouse and/or children are the beneficiary are protected from the claims of creditors.  As a result, you should be able to fully protect your while life insurance policy when you file bankruptcy.

If you are the beneficiary of a term life policy or a whole life policy and the person dies while you are in bankruptcy, those proceeds belong to your estate or the court.  As an example, if your great uncle Billy dies and leaves you $100,000, the $100,000 life insurance proceeds would be payable to the bankruptcy trustee to pay your debts.  If the life insurance proceeds pay all your debts in full, any remaining life insurance proceeds would be paid to you.  Life insurance proceeds that you become entitled to within 180 days of the date the bankruptcy is filed with the court is also property of the estate.  As a result, if uncle Billy dies two months after your bankruptcy is completed, but it is within the 180 days of the date you filed bankruptcy, those proceeds would become the property of the estate as well.  Therefore, you should tell your bankruptcy attorney if you believe you may receive any life insurance proceeds during the six months after you file.  As always, you should seek the advice of your bankruptcy attorney.