There are three types of tax debt. The first type is unsecured priority tax debt which is not dischargeable in bankruptcy. That includes recent tax debt within the last three years.
The second type is unsecured non-priority tax debt. This type of tax debt is dischargeable in bankruptcy. This would include tax debt for returns that were due and filed over three years ago or assessed by the IRS over 240 days prior to filing your bankruptcy case. We can verify the date the tax got assessed by the IRS if you obtain an account transcript.
Interestingly, there are times when the tax return was timely filed over three years ago, but the IRS assesses the tax liability years later. This often occurs during an audit where additional tax debt is assessed.
Tax debt will not be dischargeable if the taxes haven’t been timely filed or filed within two years of filing for bankruptcy. Fraud or tax evasion would also be grounds for having your debt be non-dischargeable.
The third type of tax debt is secured tax debt where the IRS files a lien against your property. This occurs less frequently. We recommend contacting the IRS Insolvency Unit approximately 60 days after receiving your discharge to confirm that your tax debt is discharged.
We have clients who move here from other states who are behind on their state income tax. Fortunately, we don’t see this issue too often since Florida has no state income tax.
State income tax essentially follows the same rules as federal income taxes in terms of whether those taxes would be dischargeable or not in a bankruptcy. If you have specific questions about your outstanding tax debt, feel free to contact my office.
There are certain income qualifications for a Chapter 7 bankruptcy. Social security income, including social security disability does not count as income on the means test (the test on the bankruptcy petition that determines which chapter of bankruptcy you qualify for). Similarly, veteran disability benefits do not count as income. For example, if you are receiving social security or veteran disability benefits you could make an unlimited amount per month and still qualify for a Chapter 7 bankruptcy.
Some people are surprised that pensions for government work such as teachers, police officers, military, or firemen still count as income. Workers’ compensation benefits also count as income. Short-term or long-term disability from a private company that is not social security are considered income. Regular wages or income from self-employment are considered income. Child support and alimony are considered income on the means test. Even if the income is not taxable, it could still qualify as income on the means test.
The issue of whether money in your account at the time of filing is exempt is a totally different issue than whether it counts as income on the means test. For example, workers compensation, child support and alimony are generally exempt even though they are considered as income on the means test Any money you have in your bank account from one of these sources in addition to social security or veteran disability benefits would be protected from the trustee.
We can exempt up to 75% of wages in your bank account. However, self-employment income is not exempt. It is important to have an attorney help you evaluate your candidacy for a Chapter 7 bankruptcy and to ensure you maximize your property exemptions.
1) Use credit cards, open new credit lines, or take out cash advances. This could be viewed as a bad faith filing if you take out a large credit line then file for bankruptcy within a few months. The reason is because it appears that the money was taken out without the intention to repay the debt. This could result in the debt potentially not getting discharged. Cash advances taken out and not repaid 90 days prior to filing your bankruptcy case would likely have to be repaid.
2) Give any gifts over $500. If this happens, expect to have to repay the trustee the equal amount of the gift. So, you give your mom a $1,000 birthday gift, you or your mom will be repaying the trustee $1,000.
3) Repay any family members or friends. Same scenario, you’ll have to repay the trustee whatever repayment you have made to friends or family members (insiders) in the last 12 months.
4) Make more than a regularly monthly payment on your car, rent or mortgage. This is considered a preferential payment.
5) Take out large cash withdrawals out of your bank account. The trustee could ask for receipts for these withdrawals to see how the money was spent. It’s much better to deposit funds and use a debit/check to track how the money was spent.
6) Gamble. There are a few potential problems associated with gambling. First, if your spending $500 a month gambling, that money could be used to pay your creditors. Second, if you are incurring debt and taking out credit lines for the purpose of gambling that is also problematic.
7) Sell, transfer, borrow against, or dispose of any property. You do not want to convert assets that would be exempt to a non-exempt asset, or you’ll potentially need to pay the trustee.
8) Purchase new assets. If you purchase an asset, it might not be covered by the bankruptcy exemptions. If that happens you would need to pay the trustee or surrender your personal property. It’s critical to get legal advice, prior to selling or purchasing any property (personal property, real property, or vehicles) prior to filing.
9) Spend money on unreasonable expenses such as vacations or luxury items. Your bank statements are produced so it’s evident when and where money is taken out and spent. Any luxury items can also be viewed as a bad faith filing if you are spending frivolously instead of paying your creditors.
10) Get married. You can get married, but if you do, your spouse’s income gets counted towards the means test and could put you into a Chapter 13. If you’re in the middle of a divorce or getting married, definitely discuss the potential ramifications with your lawyer.