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,   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 […]

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.


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.