The Short and Long Term Effects of Bankruptcy

Since my law firm began offering Chapter 7 and 13 bankruptcy filing services to residents of Northern California a few months ago, I have been more focused on bankruptcy on my blog. There is a lot of misinformation about bankruptcy out there, so I wanted to explain some of ther short and long term effects of filing for bankruptcy.

Short Term:

Discharge or Restructuring of Debt

Filing for bankruptcy can be a difficult and stressful process, but once it’s done, you can have a fresh financial start. Depending on what type of bankruptcy you filed (Chapter 7 or 13) you will either have your debts discharged or restructured, both giving you the opportunity to get your finances back on track.

Expenses

Filing for bankruptcy will eliminate or restructure your debts, but there are some expenses involved. If you hire an attorney, you should expect to pay a fee to retain their services, and you may also need to pay a trustee fee. It seems odd, having to spend money to declare bankruptcy, but these expenses are simply unavoidable, and can help ensure your case is filed properly.

Difficulty Obtaining Credit

Because bankruptcy shows up on your credit report, you will likely find it harder to get credit. And when you are approved, you will find you must pay higher interest rates than before you filed. This can make it difficult to buy a car, a home or even get a simple credit card for a while, but you must be patient. Your credit will improve over time as you work toward a better financial future.

No More Hassling Calls

One of the best short-term effects of filing bankruptcy is that you will no longer have to deal with harassing calls from creditors. As soon as you hire an attorney to handle your case, creditors are legally required to stop contacting you. This can reduce your stress level immensely; some even say this effect alone makes filing for bankruptcy worth it.

Long Term:

Credit Report

Depending on what type of bankruptcy you file for, it will show up on your credit report for either 7 or 10 years. Lenders, employers and new landlords will often check your credit report to get information about you. You may be able to lessen the impact by filing a letter with credit agencies explaining the extenuating circumstances that lead to your decision to file for bankruptcy.

Job Applications

Some employers will ask if you have ever filed for bankruptcy when you are applying for a new job. Even though it may not show up on your credit score any longer, for some positions you will still be required to let your employer know that you filed for bankruptcy in your lifetime. However, since bankruptcy filing is becoming more common, a reasonable explanation for why you needed to file can help an employer see past the bankruptcy.

Life Insurance

For some reason many life insurance applications will ask if you have ever filed for bankruptcy in your life. Even if ten years have passed, you will still be obligated to answer "yes." This can affect your policy and rates, and being dishonest is technically committing fraud. Again, this is where a tough economy can work in your favor, as more people file for bankruptcy, the stigma will lessen as will the negative impact.

Consumer Bankruptcies Hit 5-Year High in 2010

According to estimates, the number of American taxpayers who filed for bankruptcy protection in 2010 was the highest in nearly half a decade. Experts predict these numbers could increase in 2011 as Americans continue to struggle with debt and an uncertain economy.

Reuters reports:

Roughly 1.53 million consumer bankruptcy petitions were filed in 2010, up 9 percent from 1.41 million in 2009, according to the American Bankruptcy Institute, citing data from the National Bankruptcy Research Center.

Filings in December totaled 118,146, up 4 percent from a year earlier and 3 percent from November's total.

The full-year total is the highest since the 2.04 million recorded in 2005, when there was a rush to seek bankruptcy protection ahead of a stricter federal law taking effect in October of that year.

Samuel Gerdano, executive director of the ABI, said filings are rising even as consumers try to cut spending and debt after the 2008 financial crisis and accompanying recession, and with the unemployment rate at 9.8 percent.

He said there is usually a 12- to 18-month lag between declines in consumer spending and bankruptcy levels.

According to the Federal Reserve, U.S. consumer credit outstanding has fallen in 19 of the last 21 months for which data are available, declining to $2.41 trillion in October 2010 from $2.57 trillion in January 2009.

"Consumers have been on sort of a strike when it comes to taking on more debt, as they become more aware of the dangers of high debt burdens in a weak economy," Gerdano said.

Continue reading at Reuters.com...

5 Steps on How to File For Chapter 7 Bankruptcy Successfully

These days millions of Americans are looking to bankruptcy as a solution to their financial problems. For some, bankruptcy provides the fresh start they so desperately need; however, it is a decision that should not be taken lightly. If you and your family do decide that bankruptcy is the right decision, here are the 5 steps you will need to take, courtesy of Mortgage11.com.

Consult a competent bankruptcy lawyer

Proper bankruptcy information could be essential before you actually file for chapter 7. Hence, it could be vital for you to consult a competent bankruptcy attorney who is well versed with the new bankruptcy rules and regulations as well as filing procedures. But you need to furnish complete information regarding your current financial position during the free consultation.

Do your home work thoroughly well

You need to do some preliminary homework after knowing chapter 7 bankruptcy requirements from your bankruptcy lawyer. Normally, you are required to submit copies of past 6 pay stubs, statements from bank or on retirement accounts, credit card statements, copies of tax returns for the previous 3 years, details of property assets and credit report too. In addition, you need to answer a lengthy questionnaire and even undergo credit counseling which is mandated by the new bankruptcy laws.

Prepare the paperwork and sign the petition

Once you are ready with the required information, your lawyer would prepare a petition. All that you need to do is just review and sign it. In any case, while doing so you need to verify that every information provided in the petition is correct and accurate. After you sign the documents, the bankruptcy attorney would file your case in the court. In the next step, you would come to know what happens when you file bankruptcy.

Attend the “341 hearing”

The entire bankruptcy filing process can give you a lot of anxiety. After you have filed the case, you could be required to attend a “341 Meeting” involving your lawyer, creditors and the court appointed “Trustee”. Usually, such a meeting lasts for hardly 3 minutes and could be over within no time.

Go for post-filing class and wait for 60 days

You need to go for a post-filing class at the earliest. This could be important otherwise all your hard work could go in vain. And after the “341 Meeting” is over, you could be required to wait for about 60 days, as per bankruptcy rules, during which your creditors or even Trustee can file an objection. If there are no objections, you could qualify for a discharge of debts.

Read more here

Questions for the Tax Lady: January 10th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, I read that your firm is now offering bankruptcy representation, what states are the services available in?

Answer: Yes, my law firm recently rolled out bankruptcy services. Our firm can represent people in the Eastern District of California. For more information on bankruptcy and our services you can visit http://bk.ronideutch.com/.

Question: What is the difference between filing Chapter 7 and Chapter 13 bankruptcy?

Answer: Great question! Depending upon a person’s current financial situation, one chapter will be better suited to their needs than another. Here’s the main difference:

Chapter 7 Bankruptcy is set up for people who have severe financial difficulties, and cannot repay their debts at all. A successful Chapter 7 filing will result in debts being “discharged,” meaning, you are not obligated to pay back the debt, and the creditors cannot try to collect from you.

Chapter 13 Bankruptcy is designed for people who have a regular source of income, but are having trouble paying their debts. A successful Chapter 13 filing may result in some debts being discharged, but most debts will be restructured so that you can afford to make regular payments to reduce your debts.

There are restrictions for each chapter type, and not everyone will qualify for either type of filing. Anyone considering a bankruptcy filing is strongly encouraged to talk to a qualified bankruptcy attorney.

5 Common Questions About Bankruptcy and Tax Debts

It is not uncommon for those calling my law firm about their IRS tax debt to ask about Bankruptcy.

My law firm recently began offering bankruptcy services to residents of Northern California, this blog discusses the most common questions we receive about bankruptcy and tax debts—and their answers of course.

1. Will my tax debts be resolved by filing for bankruptcy?

Unfortunately, there is no straightforward answer to this first question, as it will depend on your unique financial situation. There are some basic parameters, but there are many exceptions to the general rule. You should always consult with a bankruptcy attorney to determine if your tax debs will be settled by filing bankruptcy.

If your IRS liabilities meet a strict set of conditions then they may qualify to be discharged through Chapter 7 bankruptcy. On the other hand, if you file for Chapter 7 and you have assets that are not exempt, they may be liquidated and the proceeds distributed to creditors. Since the IRS is considered a creditor, a court appointed trustee would examine any claim they might file and determine if it should be paid. If the tax debt is not dischargeable, you may still owe the balance of the tax debt even if they were paid in part.

If you file a Chapter 13 bankruptcy and you have tax debts that cannot be discharged in Chapter 7, you will be required to pay the taxes in full over a period of time up to 60 months, along with certain distributions to other creditors.

2. What are the qualifications to have my debts discharged?

In order to have unpaid tax debts discharged through Chapter 7 bankruptcy all of the following conditions must be met. If even one is not met, then the debts will remain after the proceedings have concluded.

1. The debts must be related to a return that was last due at least three years prior to the bankruptcy filing. The limit also takes extensions into account; therefore if you requested a six-month extension on any of your returns it will add another six months to your wait time.
2. The IRS assessed your tax debt at least 240 days before you begin proceedings.
3. The tax debts must have resulted from unpaid income taxes. Other debts such as unpaid employer payroll taxes and trust fund recovery penalties cannot be discharged.
4. The income tax debt cannot be the result of having filed a fraudulent return or from willfully attempting to evade or defeat the tax.

3. If my tax debts are discharged will it remove an IRS lien?

Again, this is going to depend on your unique financial situation. Generally having debts discharged through a Chapter 7 filing will prevent the IRS from pursuing any additional collection activities against you. However, it will not remove any previously recorded IRS tax liens on your property. You will need to pay the value of the lien in order to have it removed.

On the other hand, if your tax debts are settled through a Chapter 13 filing, then you can have the lien removed once you finish making payments to the IRS.

4. Is it true I need to have filed my tax returns in order to have IRS debts discharged?

Yes, as I mentioned above your tax returns need to be filed with the IRS in order to have the debt discharged by filing for Chapter 7 bankruptcy. If you never filed your own return, and the IRS filed a Substitute for Return on your behalf to assess the debt, then it will not be discharged. Then, after your proceedings conclude you will still have to find a solution to your tax debt problems.

5. If my tax debts are not discharged in bankruptcy, what other options do I have?

If your tax debts do not qualify to be discharged through Chapter 7 bankruptcy then you have a handful of additional options for settling the liabilities. The IRS offers tax settlement programs such as Installment Agreements, Offers in Compromise, or placement on the IRS’ Currently Not Collectible status. For more information on any of these programs you can read about them on my law firm’s website.

If you have any question about bankruptcy you would like to get answered then send them to me via Twitter, or this Questions for The Tax Lady contact form.

The Benefits of Hiring an Attorney to Help You File for Bankruptcy

My law firm recently began offering bankruptcy services to consumers in Northern California. We have been helping taxpayers resolve their federal tax debts for two decades, but many of our clients often struggle with unsecured debts as well. Filing for bankruptcy may seem scary, but it can offer relief and the fresh start that many families need in this economy. In honor of my firm’s new service, I have put together a list of advantages of hiring a professional to help you file bankruptcy.

Deciding to File

While the idea of having all or most of your debts eliminated is very tempting, filing for bankruptcy is not always the best choice. There are certain debts – such as some tax debts – that may not qualify to be discharged through bankruptcy. By consulting an experienced bankruptcy attorney, you can find out if it really is a good option for your specific financial situation.

Experience

Hiring an attorney who has experience with debts and finance will help ensure that your case is handled correctly, and that as many of your debts as possible are discharged. There are different chapters of bankruptcy, and it can be confusing trying to decide what to do on your own. In addition, laws are always changing and an attorney well versed in financial law will likely be up to date on recent changes in court procedures or bankruptcy law.

Error Control

Filing for bankruptcy on your own can be a very difficult and confusing process, but when it comes to something as serious as bankruptcy you want to avoid making any errors. An attorney who has helped clients through the process previously will know what to expect, and how to avoid making a serious error. In addition when you hire an attorney to handle your case you are really retaining an entire firm. There will be multiple legal assistants reviewing documents and helping with your case.

Valuing Assets

Putting a value on your own assets is not only difficult, but it can also be extremely emotionally straining for people. If you hire an attorney to file for bankruptcy, then you are also getting a trained, unbiased opinion when it comes to valuing your assets. They will work with you to make sure that your previous assets are not valued at less than what they are actually worth.

Hassling Calls

Anyone who has been in debt severe enough to file for bankruptcy knows that the relentless calls from creditors can be exhausting, embarrassing, and scary. However, once you hire an attorney, creditors and lenders can no longer call you directly. They are required by law to direct inquiries to your attorney.

Time is Money

When you retain an attorney to help settle your debts through bankruptcy then you may have to pay an initial fee to retain the firm. However, once you have done so they will take care of your case from start to finish. Ideally, resulting in the restructuring or discharging many debts. This is a very complicated process, and unless you are familiar with bankruptcy law, many Americans find the time and effort that goes into researching and preparing financial documents outweighs the fees associated with hiring an attorney. Finally, a trained lawyer is likely to achieve a better settlement than a person without any experience would be able to.

What Happens When Cities Go Broke?

In a new article on Forbes.com, author Jonas Elmerraji examines the possibility of a city or municipalities filing for bankruptcy. It may seem strange, but just two years ago Vallejo, CA filed for bankruptcy. With the economy stalling, we may just see more cities looking toward bankruptcy to restructure debts and obtain more attractive financing.

Forbes.com reports:

In today's shaky economic environment, bankruptcy has become a dreaded--yet not all that uncommon--phenomenon. But what happens when it's not a person or company going broke, but an entire city? With added emphasis on government finances in 2010, it's a question that more and more citizens are beginning to ask themselves.

Municipal and state bonds are investments that touch a huge percentage of the investing public. And as we're seeing right now in Europe, there's no limit to the size to which government budget problems can grow.

Here's a look at what it means for a city--or a county or state--to go bankrupt, including the fallout for its citizens and stakeholders.

New Kid on the Block

Bankrupt cities are a relatively new phenomenon. Until the 1930s, it was legally impossible for U.S. cities to declare bankruptcy due to the absence of any municipal bankruptcy legislation. That changed in 1934 when the Bankruptcy Act was modified to include municipalities, a change made in response to the growing number of insolvent towns in the U.S. during the Great Depression.

After a number of evolutions and changes, the rule emerged as today's Chapter 9 of the U.S. Bankruptcy Code. Chapter 9 bankruptcies are available exclusively to municipalities. But there are some significant differences between a city's Chapter 9 bankruptcy and the much more common personal and business bankruptcies that take place on a daily basis.

Chapter 9 bankruptcies aren't designed to extinguish excessive debts. Instead, their purpose is to aid in reorganization by allowing a city to break untenable contracts and obtain more attractive financing. That's a good thing for a city's bond holders, who would typically see their assets at risk in a corporate bankruptcy.

Read more here

Questions for the Tax Lady: September 27th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply. I will do my best to get an answer for you!

Question #1: Taxes are not our only debt, we lost our home, cars and have several medical bills, and collections along with tax levies coming all the time. Are taxes dischargeable in bankruptcy, we have to file chapter 7 anyway, and our attorney thinks he get our largest tax debt included since it is over 4 years old now.

Answer: I’m so sorry to hear of your difficulties. While not for everyone, bankruptcy can be a lifesaver for those drowning in debts.

To answer your question, some tax debts can be discharged through a Chapter 7 bankruptcy filing. There are five criteria for determining if the federal income tax debt is dischargeable:

1. The due date for filing the tax return associated with the tax debt is at least three years ago.
2. The tax return was filed at least two years ago.
3. The tax assessment is at least 240 days old. (This is one that trips people up. Make sure you know when the IRS officially assessed the debt.)
4. The tax return was not fraudulent.
5. The taxpayer is not guilty of tax evasion.

If your bankruptcy attorney is advising you to include your tax debts in the bankruptcy filing, and you are confident you meet the above criteria, then I would trust your attorney. If you are not sure your tax debt meets these requirements, you may request your tax transcripts from the IRS to verify the dates of the debt assessment, the due date of the returns and more.

Question #2: If you missed filing a tax return for two years, can you still get a payment plan from the IRS?

Answer: The IRS offers payment plans called Installment Agreements for people who are unable to pay their entire tax bill at once. However, there are some sticking points:

1. The IRS will not enter into an Installment Agreement with you until you are 100% compliant in your tax filings. Before you apply for an Installment Agreement, find a qualified tax professional to help you prepare and file the missing tax returns.

2. The IRS bases the amount of your monthly payment on your ability to pay, so be prepared for a much higher payment amount than you might hope for. The IRS has very specific guidelines for determining how much you should be paying them each month, and many taxpayers suffer from a little sticker shock when they see how much the IRS expects.

Once you’ve filed the missing returns, and have your financial information handy, fill out Form 9465 Installment Agreement Request, or visit www.irs.gov and click on I Need To… Set Up a Payment Plan from their menu options.

Bankruptcy and IRS Tax Debt

It is not uncommon that the people who come to me for back tax help have already deeply considered filing for bankruptcy. It is common to wonder if bankruptcy will solve all debt issues, including an IRS bill. The answer is: Well, sometimes bankruptcy will, but it all depends. (How’s that for a lawyer’s answer?) In any case, you must be careful because while bankruptcy might stop the IRS from filing a tax lien or pursuing collection activities, in most cases, penalties and interest are still accruing! Also, bankruptcy extends the amount of time the IRS has to collect on your debt—tax law normally limits the IRS to 10 years to collect against you. So all in all, after bankruptcy, your IRS tax debt may still be lurking around—and may even have more zeros tacked on.

The type of bankruptcy you file is a factor in whether or not your tax debt will be “discharged”. There are so many rules and exceptions when it comes to bankruptcy and unpaid tax debts. I recommend that if this is something you are considering that you talk to a professional—do not attempt to do this on your own.

For more information, check out this article I recently read on the topic of bankruptcy and taxes: http://bit.ly/dvn5h9.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

There are many people wondering, if they owe a debt to someone and that person cancels or forgives the debt, is the canceled amount taxable as income next year? The answer is: it depends on the type of debt canceled. Generally, if a debt for which you are personally liable is forgiven or canceled, other than a gift, you must include the amount in your income. However, there are exceptions.

According to the IRS, the most common situations when cancellation of debt income is not taxable involve:

• Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
• Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your canceled debt is generally not considered taxable income.
• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

Due to the current housing market, I am sure the exclusion of qualified principal residence debt forgiveness from taxable income is a sigh of relief for many. The Mortgage Debt Relief Act of 2007 generally will allow taxpayers to exclude this discharge of debt on their principal residence. Mortgage debt through foreclosure or debt reduced through restructuring will not be taxable for the calendar years 2007 through 2012. The maximum amount of qualified primary residence debt is $2million ($1 million if married filing separately).

For more information regarding debt forgiveness you may want to visit the IRS’s website or talk to a qualified tax professional.

Questions for the Tax Lady: May 10th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: How much money do you need to make to benefit from itemizing your return?

There actually is no income range that will determine whether you would benefit more from claiming the standard deduction or itemizing your return. It all depends on how many deductions you qualify for. Add up the dollar amount of all the deductions in which you would qualify and if the total is higher than the standard deduction, you should itemize your return. If it is lower, then you should claim the standard deduction.

Question #2: I am in the process of filing bankruptcy. Will I need to include the resulting canceled debts on my tax return next year?

No. A taxpayer will not need to include debt canceled by bankruptcy if the cancellation of debt is granted by the court or occurs as a result of a plan approved by the court. None of the debt canceled in a bankruptcy case is included in the debtor’s gross income in the year it was canceled.

Pistons Rick Mahorn files for bankruptcy

Even the extremely well paid NBA stars are not immune to our struggling economy, paying overdue bills, and IRS debt. Rick Mahorn, former Detroit Pistons “Bad Boy and member of the 1989 championship team had earned $6.8 million during an 18-year career but public records, according to the article I read, are showing that since 2006, the IRS has filed liens against him for almost $214,000 in delinquent taxes. Rick Mahorn’s lawyer said the tax debt has been repaid. The IRS actually seized an estimated $35,000 from his paychecks last year to satisfy the tax debt. Mahorn has since had to file bankruptcy due to failed investments and has lost his $500,000 home.

Read the full article here.

Muni Threat: Cities Weigh Chapter 9

From the WallStreetJournal.com:

Just days after becoming Controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9.

The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders.

The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities that are traditionally considered low risk.

"People believe that municipal debt is safe based on assumptions that are no longer true," says Kenneth Buckfire, managing director and chief executive of Miller Buckfire & Co., an investment bank that has worked with corporations on restructurings and now is advising municipalities. For example, it isn't safe to assume that governments can raise taxes to cover shortfalls, he says.

Even threatening bankruptcy signals that municipalities are willing to compromise the security of bondholders, says Richard Raphael, an analyst at Fitch Ratings. That makes it harder for cities and towns to raise money from investors and will slow the U.S. economic recovery.

Homebuyer Tax Credits Threaten the FHA

From the WallStreetJournal.com:

A few weeks ago, President Barack Obama signed legislation extending an $8,000 tax credit for first-time home buyers. The refundable tax credit, available even if a family has no taxable income, will enable many more buyers to close on a home. But it also could bankrupt the Federal Housing Administration (FHA) and, by doing so, damage an already weak housing market.

The tax credit was put in place as part of the stimulus package signed into law earlier this year. Initially, it was available only to first-time buyers with a combined income of $150,000 or less ($75,000 for individuals). Approximately 40% of all first-time buyers used the credit in 2009, so extending it was strongly supported by real estate brokers, home builders and their congressional allies.

The extension the president signed makes the credit available to first-time buyers, but also to people who have owned a home for at least five years. In addition, it raises the maximum income for a qualified buyer to $225,000 a year for couples and makes the credit available until mid-2010. (It had been set to expire at the end of this month.)

The problem is that the FHA insures mortgages of homes below certain price levels with such a low down payment that it can be funded solely by the refundable tax credit. And, as we've seen in the recent housing crisis, buyers with no skin in the game are more likely than others to default on their mortgages when the value of their home falls below their mortgage balance.

Here's how the credit allows buyers to avoid putting their own money at risk. Suppose a couple making $60,000 annually buys a home worth $200,000. They can get an FHA-insured loan if they put down 3.5% of the purchase price, about $7,000. The couple will also need to come up with another $1,000 in closing costs, for a total of $8,000. The couple can either dip into savings or borrow that money from relatives or somewhere else on a temporary basis.

Tightening the Bankruptcy Laws in the Midst of a Deep Recession

From Creditslips.com:

Beginning on November 1, some people might suddenly find they are now ineligible for chapter 7 bankruptcy. Making it harder to file bankruptcy in the middle of our financial crisis may not be the best policy idea to come down the pike, but it is exactly what Congress set in motion in 2005. Here is why.

The U.S. bankruptcy law has a means test that is meant to filter "can pay" debtors into chapter 13. It's a test that was not needed--there was no evidence of widespread abuse of the bankruptcy system--and the test is not having its intended effect--the income distribution of filers has not changed. The means test begins with an inquiry that asks whether a debtor is above or below the state median income for a household of the same size in the debtor's state.

The state median income figures are periodically updated by the U.S. Census and the Executive Office for U.S. Trustees (EOUST) publishes a table that is used in the bankruptcy courts. Don't blame either the Census or the EOUST for this one. They are just doing what Congress directed. These changes happen automatically.

With the recession, incomes are going down. Thus, in half of the data points on the table, the median income that will subject a debtor to the means test has decreased. In Illinois, for example, right now a filer from a 1-person household goes through the means test if he or she has median income above $47,355. On November 1, that will change to $46,105.

U.S. Consumer Bankruptcies Rose 24 Percent in August

From Bloomberg.com:

U.S. consumer bankruptcy filings rose 24 percent in August from the previous year to 119,874, according to the American Bankruptcy Institute and National Bankruptcy Research Center.

“Consumers continue to turn to bankruptcy as a shield from the sustained financial pressures of today’s economy,” said Samuel Gerdano, the executive director of the American Bankruptcy Institute. “As a result, we expect consumer filings to top 1.4 million this year.”

While the August figure was an increase over the prior year, filings declined from July’s total of 126,434, the groups said in a statement.

The current wave of consumer bankruptcies has swept up celebrities such as actor Stephen Baldwin, former baseball player Lenny Dykstra and celebrity photographers Markus Klinko and Indrani Pal-Chaudhuri.

Bankruptcy Filings Up 35 Percent In Past Year: Court

According to data compiled through US courts, bankruptcy filings in the U.S. have gone up a staggering 35% over the last year. Last year there were about 968,000 people who filed for Bankruptcy, compared to over 1.3 million in just the past 11 months.

Business bankruptcies, like the high-profile collapse of General Motors Co. GM.UL and Chrysler LLC, totaled 55,000, while non-business filings totaled 1.25 million, the courts office said.

Filings increased among all types of bankruptcies.

Chapter 7 filings, which require debtors to sell their nonexempt property, rose 47 percent to 908,000.

Chapter 13 filings, which enable wage earners to come up with a plan to repay debtors, rose 12 percent to 384,000.

Chapter 11 filings, used to reorganize bankrupt businesses, rose 91 percent to 14,000.

Chapter 12 filings, used by farmers or fishermen, rose 34 percent to 422.

Continued at Reuters.com…

Bankruptcy and IRS Tax Issues

Every month thousands of taxpayers call my law firm for help with IRS back tax debts. We get hundreds and hundreds of questions on a weekly basis, but one of the most common is whether tax debts can be discharged through bankruptcy or not. Although the exact “yes” or “no” answer will depend on your unique financial situation, the attorneys of my law firm have put together the following helpful article on bankruptcy and IRS tax issues.

Chapter 7 vs. Chapter 13

The two common types of bankruptcy for individuals are Chapter 7 (liquidation) and Chapter 13 (readjustment of debts). Although each are governed by their own set of requirements and conditions, tax debts are generally treated similarly under both proceedings. However, the basic concepts behind each bankruptcy type will dictate how the debts are settled.

In general – under Chapter 7 –if the debts meet all of the conditions below, then they can be discharged during the bankruptcy proceedings, but if even one qualification is not met, then the debts will remain after the bankruptcy. However – under Chapter 13 – there is almost always a distribution to creditors. Therefore, the court appointed trustee must negotiate with the IRS and decide on a settlement.

Qualifications for Discharge

Although many taxpayers are under the impression that tax debts cannot be discharged, some actually can! However, in order for tax debts to qualify to be discharged, they must meet a hefty list of requirements. According to bankruptcy laws, the follow conditions must be met:

1. Tax Return Filed

Even if you are unable to pay the taxes due, you must still file a tax return before a tax debt can be considered for discharge. Additionally, the tax return for the tax debt that you want discharged must have been filed at least two years prior to the bankruptcy filing, regardless of when the returns were originally due.

Continued at Roni Deutch.com…

With Bankruptcy Looming, a New GM Begins to Emerge

From the Associated Press:

With an almost certain bankruptcy filing days away, General Motors is beginning its reinvention, planning to retool one factory to make its smallest vehicles ever in the U.S. and rid itself of the biggest.

As GM's board began two days of meetings Friday to make a final decision on the company's fate, GM was also closing in on a sale of its European Opel unit, and its main union overwhelmingly approved dramatic labor cost cuts. A deal to sell its rugged but inefficient Hummer brand also appeared on the horizon.

The moves provided more clues about what a restructured GM might look like ahead of the expected Chapter 11 filing Monday. Taxpayers will eventually own nearly three-quarters of a leaner GM, with a total government commitment of nearly $50 billion.

GM has yet to confirm it will seek bankruptcy protection but scheduled a news conference for Monday in New York.

With the government's backing and nearly $20 billion in U.S. loans so far, the company has made more dramatic changes in just a few days than it has in decades.

"It's been coming to a head for a very long time," said Aaron Bragman, an analyst for the consulting firm IHS Global Insight. "But in just the past few months we've really seen steps being taken to completely and dramatically change the face of American auto manufacturing."

GM said it plans to reopen a shuttered U.S. factory to build subcompact cars. The retooled factory would be able to build 160,000 cars a year and create 1,200 jobs, offsetting some of the 21,000 that will be lost when GM closes 14 factories by the end of next year.

GM's stock tumbled to the lowest price in the company's 100-year history, closing at just 75 cents after trading as low as 74 cents. The government plan for GM revealed Thursday would make the shares virtually worthless.

The United Auto Workers' reluctant but overwhelming ratification of concessions will save GM $1.3 billion per year and bring its labor costs down to those of its Japanese competitors. The new UAW deal freezes wages, ends bonuses and eliminates some noncompetitive work rules.

The changes, plus others that will be worked out in court, will shrink GM and position it to be among the world's most competitive automakers if it can emerge from bankruptcy protection and survive the global auto sales slump, Bragman said.

Chrysler Owes U.S. Tax Payers 350,000 Cars---That You'll Never Drive

In filing for bankruptcy, Chrysler will be able to avoid paying back a $7 billion bailout debt owed to US taxpayers. You can read a segment of an Examiner.com article examining the topic below, or read the full post here.

You know when the sentence begins with the words, "This revelation was buried within Chrysler's bankruptcy filings," it can't be good news.

And it certainly is not good news for the Obama administration or for Chrysler.

CNN is reporting that, "Chrysler LLC will not repay U.S. taxpayers more than $7 billion in bailout money it received earlier this year and as part of its bankruptcy filing."

The story goes on to detail how Chrysler recent bankruptcy was structured, and I fear you can probably guess the rest.

The rest being that a deal that was struck in some back rooms in Washington leaving the U.S. tax payer with pretty much nothing to show for the $7 billion bailout given to Chrysler so far.

"The reality now is that the face value [of the $4 billion bridge loan] will be written off in the bankruptcy process," said the official, who added that the 8% equity stake that Treasury will be receiving as part of the company's reorganization is meant to compensate taxpayers for the lost money," CNN goes on to report.

If you do the math, and as a journalist I must confess that I'm really bad at math, you'll eventually arrive at the number 350,000.

That's the number of Chrysler cars the Federal government could have purchased with $7 billion dollars---if you consider that each car costs $20,000.

It is hard not to wonder what 350,000 more car sales would have meant to Chrysler's business had the Fed decided to use the money to buy cars instead of underwrite questionable---no make that---bad loans.

It might have meant that Chrysler would not be in bankruptcy as 350,000 car sales would have represented a serious boost to its bottom line.

It probably would have have meant that President Obama would now be answering fun questions about that brand new orange Challenger sitting in the White House garage, instead of hard questions about why exactly his task force struck a backroom deal that lost tax payers billions, and why the details of that deal were, "buried within Chrysler's bankruptcy filings" and not discussed openly and publicly.