First off, I am not a CPA—or even a tax attorney. However, a large number of potential clients who visit me to inquire about the advantages of bankruptcy relative to those of a short sale (or outright foreclosure walk-away) when distressed real estate is their primary concern have not realized that there may be tax-related disadvantages to the short sale of a property or walking away via foreclosure.
Indeed, there can be.
One of the primary reasons that people are filing for bankruptcy these days is to let go of and truly walk away from real estate that is significantly underwater or in foreclosure. Bankruptcy is in nearly all cases a vastly more cost-effective and time-efficient means of walking away from a home than is a short sale in which homeowners must negotiate with and often pay off lenders to get their agreement on the sale (not to mention the tax liability that short sales can leave them with!), and it is certainly more effective than simply letting a house go to foreclosure, which, particularly here in Michigan, can result in potentially huge “deficiency debts” to the mortgage-holding bank.
However, the surrender of a home in bankruptcy, which requires no negotiation with creditors or banks, incurs no tax liability, and leaves you free from worry over collections for deficiencies owed, unlike short sales, does not instantly immunize a homeowner from all costs associated with the property. Until the home is, per the deed or title filed with the register of deeds for the county in which the home sits, no longer titled to the homeowner, there will remain some costs: insurance and maintenance, primarily.
In Chapter 7 or Chapter 13 bankruptcy, debts are classified according to certain categorizations established by the Federal Bankruptcy Code: administrative, secured, priority unsecured, and unsecured. These classifications are especially important in Chapter 13 bankruptcies, in which the class of a debt determines in what order and to what extent the debt is paid by the Chapter 13 Trustee through the Chapter 13 payment Plan.
Priority unsecured debts are paid second-to-last in a Chapter 13 Plan, and, in either a Chapter 7 or a Chapter 13 bankruptcy, a “priority” classifications generally means that the debt is non-dischargeable.
Overpayments of Social Security benefits are unsecured debts just like credit cards and medical bills, and they are therefore dischargeable in Chapter 7 and Chapter 13 bankruptcy in most cases, short of any finding of fraudulence in the acceptance of the payment by the recipient. In other words, so long as you did not accept the payments knowing that you were not entitled to it—or knowing that you were about to file for bankruptcy—the overpayment amount can be discharged in a Chapter 7 or Chapter 13 bankruptcy.
Chapter 13 bankruptcy is a “reorganization” bankruptcy rather than a complete liquidation of debt as in a Chapter 7. A Chapter 13 is, basically, a payment plan enforced by the Federal Bankruptcy Court upon all of your creditors, whether the debt is a “dischargeable” debt like a credit card or “non-dischargeable” debt like a child support arrearage or recent income taxes owed. Contrary to popular belief, you are not required to pay back 100% of what you owe to your creditors in a Chapter 13.
Guest Post by Atlanta Bankruptcy Attorney Peter Bricks.
Many people use the tax return system as a pseudo savings account. They count on getting a federal and state refund every year and immediately use all the money to pay for all the necessary home upgrades, car repairs, medical bills, etc.. that they have been waiting to fund all year.
Put those same people as debtors in a Chapter 13 bankruptcy, and they should consider altering that strategy. For starters, depending on your district, your confirmed plan probably requires you to turn over your tax refund to your bankruptcy trustee. That doesn’t necessarily mean the debtor will not get his/her refund, just that it’s no guarantee and might require a motion for the court’s approval to retain the tax refund. (Note that, in the Eastern District of Michigan, tax refunds ARE required to be turned over to Chapter 13 Trustees for the life of a Chapter 13 Plan. – JMH)
Posted in Bankruptcy Process, Chapter 13, Michigan, Tax debt, Tax Returns and Bankruptcy
Tagged Bankruptcy, Chapter 13, detroit, hilla, tax refunds, taxes
Income tax debt is, under some circumstances, dischargeable in Chapter 7 bankruptcy. Even outside of those circumstances, it is at least “treatable” in a Chapter 13 bankruptcy in a manner that can be a much better deal for the taxpayer than any of the payment schemes offered by the IRS.
Income tax debt, whether Federal or state income tax debt, is, for starters, classified as a “priority” claim by the Bankruptcy Code. In a Chapter 7 bankruptcy context, that means that, unless the debt meets certain criteria, it is non-dischargeable and the bankruptcy will not affect the filing debtor’s obligation to pay it. In a Chapter 13 bankruptcy context, “priority” classification means that the debt must be paid in its entirety within the Chapter 13 bankruptcy payment plan (60 months maximum).
Posted in Chapter 13, Chapter 7, Debt Listing, Tax debt, Tax Returns and Bankruptcy, Uncategorized
Tagged Chapter 13, Chapter 7, debt, discharge, priority debt, tax debt, taxes
