Tag Archives: bankruptcy

Amended Tax Returns and Discharging Taxes in Bankruptcy

By Ryan C. Wood

In my previous blog articles I have explained that taxes are dischargeable in bankruptcy if they meet the following requirements: 1) the taxes were due more than 3 years ago, 2) filed more than 2 years ago, 3) assessed more than 240 days ago, 4) filed in good faith, and 5) is not filed fraudulently. What happens if you have to file an amended tax return?

Taxes will become a more common reason for people to file for bankruptcy protection. Bankruptcy lawyers everywhere are seeing more and more people with significant tax debts. Our taxes are not going to decrease anytime soon either.

Everyone makes mistakes sometimes. That is human. Everyone should be allowed to correct those mistakes if possible. If you amend your tax return and you end up owing more money to taxing authorities such as the Internal Revenue Service or the California’s Franchise Tax Board, how does this affect the dischargeability of the taxes owed if you hire a bankruptcy attorney and file for bankruptcy?

If you amend your tax return you may be relieved to know that the amendment of your tax return does not change the filing date of the original return. Your tax return will still be considered to have been filed the first time you filed the tax return. For example: you have filed your 2005 tax returns on April 15, 2006. The IRS contacts you in 2009 to notify you that you have made a mistake on your return and you need to amend your tax returns. You file the amended tax returns on June 15, 2009. You file for bankruptcy on July 1, 2009. The 2005 tax debt should still be dischargeable because you filed the original tax returns more than 2 years prior to the filing of your bankruptcy case.

One thing to note is that if there are additional taxes assessed due to the amended tax return, those additional taxes will be subject to the 240 day assessment rule. For example: you owed $1,000 when you filed your 2005 tax returns on April 15, 2006. When you amended your tax returns on June 15, 2009, an additional $500 was assessed on June 30, 2009. If you filed for bankruptcy on July 1, 2009, the original $1,000 tax debt would still be dischargeable. The additional $500 taxes that were assessed would not be dischargeable yet. If you filed your bankruptcy case on February 26, 2010 or later, the entire $1,500 would be dischargeable. Taxes are complicated. Bankruptcy laws are complicated.

What Mental State is Required for Defalcation While Acting in a Fiduciary Capacity?

By Ryan C. Wood

It has long been understood that under 11 U.S.C. §523(a)(4), you would not be able to receive a discharge of your debts in bankruptcy if those debts were incurred due to a fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. On May 13, 2013, the Supreme Court described the scienter (state of mind) necessary to be considered “defalcation” in the case of Bullock v. BankChampaign, N.A., 569 U.S. _____ (2013).

In Bullock, Bullock’s dad made him the trustee in a trust that was established for Bullock and his four other siblings. Bullock borrowed money from the trust but he made sure the trust was repaid with interest every time he borrowed money. Bullock’s siblings sued him for a breach of fiduciary duty in state court and won. The state court imposed constructive trusts for the judgment and BankChampaign served as the trustee for the trusts. Bullock had to file bankruptcy because he was not able to liquidate his assets to pay for the judgment. BankChampaign opposed the discharge of the debt because it claimed the debt was for defalcation while acting in a fiduciary duty. After the bankruptcy court, federal court, and court of appeals all affirmed that the debt was not dischargeable, Bullock sought certiorari to decide whether defalcation applied even if there was no ill intent.

The Supreme Court concluded that defalcation requires an intentional wrong. “We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as equivalent…Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary ‘consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty.” Bullock v. BankChampaign, N.A., 569 U.S. _____ (2013).

The Supreme Court decided to hear this case because there were different rulings throughout the country on whether a mental state was necessary to determine if there was defalcation. In the Ninth Circuit a bankruptcy lawyer only had to prove an innocent mistake took place by a fiduciary. Some circuits considered an act to be defalcation if the person did or fail to do something they were required to do in their fiduciary capacity. Whether the person knew the act or failure to act was wrong or not did not matter. Then there were some circuits that required a showing of extreme recklessness. The Supreme Court wanted to be sure that all the circuits applied the same standards and their ruling are more consistent. This also means that creditors objecting to the discharge of certain debts due to defalcation have more to prove. Their bankruptcy attorney cannot just claim that there was a wrongdoing, but now must prove actual intent to harm or recklessness. Did the debtor act in a way that a law abiding person would in the same circumstances? There are many questions that remain to be answered regarding this new defalcation requirement.

Should I Have Bank Accounts At the Same Bank I Owe Money To?

By Ryan C. Wood

Most people have at least one bank they are loyal to and have multiple types of accounts with that bank. I am sure that whatever bank you currently do business with (such as Bank of America, Wells Fargo, Chase, Citibank, San Mateo Credit Union, Fremont Bank, credit unions, or any other bank) offers you incentives and seemingly great deals to open another type of account with them. The new account could be a credit card, car loan, a mortgage or home equity loan, or home equity line of credit. This is a great opportunity for the banks to easily obtain more business from you since you are already a customer. Unless you hate your bank you would most likely take the bank up on the offer if you need that additional service. You are probably thinking that you need that service anyway so why not with a bank that you already know and trust? You can see all your accounts on one screen and take care of the payments easier and more efficiently. That is exactly what the banks want you to think and feel.

If everything in your life is going great there would be no issues with having multiple bank accounts, a credit card, car loan or a mortgage and line of credit with the same bank. What happens once you have a financial setback though? What happens if you are unable to continue paying on one or more of the debts owed to the bank? At this point you should highly consider speaking with a bankruptcy lawyer to assess your situation. Think of it this way: your accounts are a one-stop-shop for the banks as well. Are your credit cards cross collateralized with your vehicle loan? If so then you will not get the pink slip to the vehicle unless you pay all the credit card debt too. If you are unable to make your credit card payments for a period of time, guess what? Under certain circumstances banks can take the money you owe them from your bank accounts. How can the banks do this, you ask? This process is called a “setoff” and you gave them permission to do this when you signed up for the extra credit card, car loan or home mortgage. You don’t remember giving them permission? It is probably part of the small print under the terms and conditions of the loan or credit card that you probably never read and never knew that you would be giving the banks permission to do this.

If you have a credit card with a bank that you do not have a bank account with, the bank would need to sue you first and obtain a judgment against you before they can levy your bank account. This is not necessary if you have a bank account with the bank you owe money to. They can just take it from your bank account. It will get worse if you wrote a check to pay a bill not knowing that the bank already took some money out of the bank account and then the check bounces. You would then be hit with an NSF and be charged multiple fees by the bank. Most of my clients have the same response when I advise them of this practice. They say, “Oh, the bank will never do that to me! I’ve been a loyal customer for 20 years!” As a bankruptcy attorney that has filed hundreds and hundreds of bankruptcy cases I can tell you that banks are not people; they do not have feelings. They do not care if you have been a customer for 1 year or 10 years. Banks are in the business to make money. Bottom line: do not have bank accounts at the same bank where you owe money.

Legislation May Allow Private Student Loans to be Discharged in Bankruptcy

By Ryan C. Wood

Student loans are currently non-dischargeable in bankruptcy. What this means is that even if you file for bankruptcy you will still have to pay for your student loans after receiving a discharge in the bankruptcy case. They do not get wiped out along with all your other discharged unsecured debts. This rule applies to both federal subsidized and private student loans. See 11 U.S.C. §523(a)(8).

One form of limited relief from this strict rule is what is called the Brunner Test adopted by some of the circuit courts. This test was taken from Brunner v. New York State Higher Education Services, 831 F.2d 395 (2nd Circuit, 1987). The Brunner Test states that student loans will be dischargeable if (1) you cannot maintain, based on your current income and expenses, a minimal standard of living if you are forced to repay the student loans, (2) these circumstances are likely to continue for a significant portion of the repayment period for the student loans, and (3) you have made good faith efforts to repay the loans. The courts have taken a very strict approach when determining whether the student loans are discharged. This three prong Brunner Test is very hard to pass for most people. It is very frustrating as a bankruptcy lawyer to not be able to provide complete relief for people who really need it. That is includes the burden of educational loan debt they cannot afford.

On February 6, 2013, Tennessee Democratic Representative Steve Cohen introduced H.R. 532 in the House of Representatives. There are currently 29 other Democratic cosponsors for the bill. The bill is called the Private Student Loan Bankruptcy Fairness Act of 2013. This bill will essentially render private student loans dischargeable with all the other unsecured debts such as credit card debt, medical bills, personal loans, and payday loans. There is no need to prove undue hardship. This bill says nothing about the federal student loans though, so they will still be non-dischargeable in bankruptcy even if this bill passes. H.R. 532 will undo the changes that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 brought. Prior to BAPCPA, private student loans were dischargeable in bankruptcy along with all other general unsecured debts. Only federally subsidized student loans were non-dischargeable at that time.

The Private Student Loan Bankruptcy Fairness Act of 2013 could provide needed debt relief for people with huge student loan debts. Student loan debts are currently out of control and are a burden for many recent graduates that have a lot of debt and cannot find a job. H.R. 532 has currently been referred to the Subcommittee on Regulatory Reform, Commercial and Antitrust Law. If the bill makes it past the committee it will be presented for a vote in the House of Representatives. The House has more Republicans than Democrats so we would need some of these Republicans to vote for the bill in order to pass. If you support this bill I would highly recommend you contact your representatives to vote for the bill. Public pressure goes a long way.

If the Private Student Loan Bankruptcy Fairness Act of 2013 becomes the law of the land and you have a lot of private student loans to discharge, you should immediately contact an experienced bankruptcy attorney to help you discharge those student loans in your area.

What is the Difference Between Secured and Unsecured Debt in Bankruptcy?

By Ryan C. Wood

What is unsecured debt? An unsecured debt is any debt you have that is not secured by collateral. Some examples include credit card debts, medical debts, personal loans, and deficiencies from repossessed vehicles or foreclosed homes. What is secured debt? A secured debt is a debt that is secured by collateral. The collateral may be recovered by the creditor if you default on the payments. The most common types of secured debts are real estate and vehicles. If you do not pay the debt the creditor can take possession of the collateral such as foreclosure of a home or repossession of a vehicle. Once the collateral has been taken to satisfy the debt any deficiency remaining is considered unsecured debt. Other secured debts include debts incurred to finance the purchase of a television or furniture. If you do not make the payments the television or furniture can be repossessed. Make sure you communicate to your bankruptcy attorney whether you have purchased items on credit like television or mattresses that you are still making payments for.

Why is it important to know the amount of your secured and unsecured debt when filing bankruptcy? There are several reasons. One of the reasons is that your total secured and unsecured debts determine whether you are eligible to be a debtor under Chapter 13 of the bankruptcy code. There are limits on how much secured and unsecured debts you may have. Currently (April 2013), you are not eligible to file a Chapter 13 bankruptcy case if your non-contingent, liquidated secured debt exceeds $1,081,400 or your non-contingent, liquidated unsecured debts exceed $360,475. You therefore need to know exactly how much secured and unsecured debts you have so you know if you are eligible to file a Chapter 13 bankruptcy case. Most bankruptcy lawyers will run your credit to make sure the debts listed in the petition are as accurate as possible, but you may owe money to a business or individual that does not report to the credit bureaus.

Another reason it is important to distinguish between your secured or unsecured debts is that you need to continue making payments on your secured debts if you want to keep the collateral. It does not matter what chapter of bankruptcy you file under. When you file for bankruptcy your underlying debts are discharged, but the debt is still secured to the collateral. If you stop making payments the creditor will have the right to take the collateral back. If you do not want to keep the collateral or if you cannot continue with the payments you can surrender the collateral in your bankruptcy case and the underlying debt may be discharged. Keep in mind, however, that the collateral is still your responsibility until the deed or title is transferred out of your name.

A third reason why it is important to distinguish between secured and unsecured debt is that it may affect your ability to keep your assets. Two examples: (1) In the case of In re Traverse (1st Circuit BAP decision, BAP No. MB12-025, February 4, 2013). In this case the first mortgage was unrecorded and therefore unperfected and unsecured. There was a second lien on the property that was properly recorded. The trustee was able to sell the property right out from under the person filing for bankruptcy for the benefit of the bankruptcy estate and distribute the proceeds to the creditors. If the first mortgage had been properly recorded it would have been a secured debt and the person filing for bankruptcy would have been able to continue living in her home and continue making payments on the home. (2) If you obtain a loan from a private individual to purchase a vehicle and the lender did not properly perfect his or her security interest in the vehicle, that person would be considered an unsecured creditor. If the value of the vehicle is significant enough and you do not have enough exemption room to protect that asset the trustee may potentially liquidate that asset in a Chapter 7 bankruptcy case and distribute the proceeds to the creditors.