Checklist: Tax Planning for Individuals filing Chapter 7, Chapter 13, or Chapter 11 Bankruptcy

Justin Gillman — Wed, 17 Jun 2009 14:17:32 +0000

The following is a short checklist of Tax Planning and Practice Strategies which may be followed by an attorney for an Individual considering the filing of a Chapter 7, Chapter 13, or Chapter 11 Bankruptcy.

1. Whether to File a Bankruptcy Case?

The first question to be reviewed is whether a bankruptcy filing of any kind is best for the individual. (Note: When discussing individuals, this is meant to include one person or a married couple filing a joint bankruptcy case.). Issues such as the treatment of outstanding taxes in the case, whether an individual is able to repay the necessary amounts through the case, and whether the cost associated with the case is worth the benefit to be received. For example, if an individual is unable to payoff a tax obligation in a Chapter 13 bankruptcy case in the required time, they may be better served with an Offer in Compromise with the IRS.

2. When to File?

The timing of the filing of a Bankruptcy Petition can be crucial in tax issues. One of many examples is the ability of a bankruptcy debtor to discharge certain unsecured taxes. Unsecured income taxes that were first due more than three (3) years before the bankruptcy case was filed, for which a timely and non-fraudulent return was filed, can be discharged in full in any chapter of bankruptcy. Therefore, before filing such a case, the individual and attorney should review whether the return was timely filed and whether the tax has been “due and owing” for more than three years.

3. Where to File?

Although it is rare for individuals to have choices in New Jersey as to where their case is filed, in some limited examples, individuals may have the ability to file in more than one jurisdiction and should review the relative benefits of filing in each venue.

4. Which Chapter of the Bankruptcy Code Under Which to File?

This is often the most important decision for individuals and often involves reviewing all of the financial circumstances, past, present, and future, with counsel.

5. What must be accomplished before filing a Bankruptcy Case?

Since the bankruptcy code generally requires that tax returns which are due be filed prior to the filing of the Petition, individuals should review their past tax filings and confirm that all returns are filed. If returns remain due, there should be immediate planning to have the returns filed as soon as possible.

This blog and site provide information about the law designed to help users educate themselves about their own legal needs. But legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.

Chapter 7 and 13 Consumer Bankruptcy and Tax Returns

Justin Gillman — Fri, 12 Jun 2009 12:27:40 +0000

When the Bankruptcy Code was changed in 2005, significant changes were made to the tax return filing requirements for Chapter 7 and Chapter 13 consumer bankruptcy debtors. The changes increased the need for a Debtor and their counsel to review tax filing information before filing a Chapter 7 or Chapter 13 consumer bankruptcy case.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (which applies to bankruptcy cases filed after October 17, 2005) requires that the debtor file tax returns or transcripts with the Court. See 11 U.S.C §521 et seq. In New Jersey Bankruptcy cases, Local Rules permit this requirement to be met by forwarding the last filed tax return or the tax transcript to the Trustee in the Chapter 7 or Chapter 13 case. This must be done at least seven (7) days prior to the first date of the meeting of creditors.

In Chapter 13 bankruptcy cases in New Jersey, a particular issue arises ”for any return that is not past due as of the date of the filing of the Petition”. For example, if a Debtor files a Chapter 13 Bankruptcy Case in New Jersey on April 1, 2009, the tax returns for the tax year 2008 are not “past due” until April 15, 2009. Due to the nature of the case and the need to fix the amount of claims in the case, it is difficult to confirm the Chapter 13 Plan without the return being filed. If that same Debtor has filed a timely extension of the duty to file the return (automatically fixed at six months, see http://www.irs.gov/newsroom/article/0,,id=108542,00.html), what is to be done with the unfiled return?

11 USC §1308 requires that “if the debtor was required to file a tax return under applicable non Bankruptcy law, the debtor shall file with the appropriate tax authorities all tax returns for all taxable periods ending during the four (4) year period ending on the date of the filing of the Petition.” Subsection (b)(1)(B) provides that “for any return that is not past due as of the date of the filing of the Petition, the later of (i) the date that is 120 days of that meeting; or (ii) the date on which the return is due under the last automatic extension of time for filing that return to which the debtor is entitled and for which request is timely made in accordance with applicable non Bankruptcy law.” There is a procedure built into subparagraph (B)(2) which provides that after notice and hearing, the Court can enter an Order before the tolling of any applicable filing. If the debtor demonstrates by a preponderance of evidence that the failure to file a return as required by this subsection is attributal to circumstances beyond the control of the debtor, the Court may extend the time to file the return for either thirty (30) days or “a period not to extend after the applicable extended due date for a return described in subparagraph (2).”

Important is the use of the word “may” in this provision. The Code gives the Court discretion to extend the time. Ultimately, the decision of whether the Debtor in a Chapter 13 case should be granted time to file the return is given to the bankruptcy judge.

In a recent case, a Debtor I was representing in a Chapter 13 bankruptcy case in New Jersey had filed a timely extension but was faced with the Chapter 13 Trustee’s request that the case be dismissed for failure to file the 2008 tax return. Although we were able to argue that the case should not be dismissed, the Court fixed a date before October 15, 2009, for the return to be filed.

This is an example of how the provisions of the bankruptcy code as it applies to Chapter 13 debtors in New Jersey are often complicated and should not be reviewed without the advice and counsel of an experienced bankruptcy attorney.

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Checklist: Tax Planning for Individuals filing Chapter 7, Chapter 13, or Chapter 11 Bankruptcy

Chapter 7 and 13 Consumer Bankruptcy and Tax Returns