Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

Archives for April 2016

Accruing Post-Petition Interest on Unpaid Federal Taxes (Interview Part 3 of 3)

by

Penalties for unpaid federal taxes are still dischargeable when filing for bankruptcy, but they will accrue post-petition interest that is owed to the IRS. Debt limit amounts have changed for Chapter 13 cases, as of April 1, 2016.

Editor: We recently discussed the changes in the bankruptcy laws with Christopher Holmes, Jess M. Smith, III, partners at Tom Scott & Associates, P.C., along with associate attorney Andrew DeYoung. Below is Part 3 of 3 of the transcript of the conversation.

Q. What else is new in bankruptcy law?

Chris Holmes: Some of our clients have received letters from the IRS. We thought certain taxes or certain penalties or certain interest on taxes were going to go away, upon discharge. But now the IRS is coming after people—after discharge—for non-dischargeable penalties and interest on taxes that were fully paid through the Chapter 13 plan. In the good old days we would tell people that once you’re done with that Chapter 13 plan, you’re done with the IRS; you’re done with the Indiana Department of Revenue; you have no more tax worries. Now we’re finding out that is not always true, depending upon when the tax returns were filed. So, in affect, the IRS is punishing people for not filing their tax returns in a timely fashion. So, if tax returns are not timely filed and they’re filed within two years of the filing of a bankruptcy case, those taxes are not dischargeable nor are the penalties and interest thereon. Previously, you would throw those taxes in the plan, pay them in full, and then the penalties and interest would be discharged.

Jess Smith, III: Now they’re boarding up the penalties, but accruing post-petition interest.

CH: So the penalties are still dischargeable; it’s just the interest that’s still accumulating, and will be there at the end of the road. So, now we get these calls from our clients saying, "Hey, what’s going on? I got this letter from the IRS," and we have to give them the sad news that when the law changed back in 2005, there was a provision in there that allows the IRS to collect these interest charges on debts that were otherwise fully-paid through the plan.

Andrew DeYoung: Starting April 1 of this year, and this only relates to Chapter 13 cases, the debt limits are going up. That means the amount of unsecured debt that you have is increasing about $10,000. Debtor’s going into bankruptcy are able to have another $10,000 owed out and still will qualify for a Chapter 13 case. It’s now $394,725, up from $383,175. For secured debt, the amount is now $1,184,200, up from $1,149,525. It changes every three years and it can be found in the Federal register if you use the code words "109(e)" or "Chapter 13 debt limit." 

CH: It’s pretty rare that someone would have debts of that amount.

AD: One case that we worked on the debtor had purchased some vacant real estate in Florida, when the market was doing very well. He purchased the property for roughly $300,000 to $350,000 per parcel. The value then went down to under $50,000 per parcel. We ran up against the debt limits on that issue. We were luckily able to negotiate with the creditor to work a solution in the Chapter 13, but if the creditor had not agreed to work with us we would not have been eligible for a discharge in Chapter 13 because the secured debt of the debtor was too high. In a case I’m working on now the problem is where the debtor has student loans totaling $370,000. The rest of their unsecured debt is not very high, but with the debt limits only around $390,000, absent an agreement with the Department of Education, we’re not eligible for a Chapter 13.

CH: The consequence would be that they have no choice but to resort to a Chapter 11, which is primarily designed for corporations and individuals with really, really complicated situations — and those cost a whole lot more for attorneys fees and court costs.

AD: In talking to the U.S. trustee, I was advised two days ago that you would be a fool to take a Chapter 11 for under $10,000 (as the attorney fee), which in comparison to our Chapter 13 fee would be a total fee over 60 months of $4000. $10,000 up front in one sum or $4000 over 60 months is quite a big difference.

CH: It’s rare, but once in a while you get a debtor who has that kind of debt, and then you have to really go into how much the really totals out to be. You think it might be a certain amount, but the hope is that it falls under those thresholds so you can just barely make it into a Chapter 13.

Part 1 of Interview: What’s New in Bankruptcy Law in Indiana

Part 2 of Interview: Property You Can Protect When You File for Bankruptcy

Property You Can Protect When You File for Bankruptcy (Interview Part 2 of 3)

by

Retirement accounts are exempt from creditors when filing for bankruptcy, but an inherited IRA is not. A recent ruling extending the time to cure arrearage might help you save your house after a tax sale.

Editor: We recently discussed the changes in the bankruptcy laws with Christopher Holmes, Jess M. Smith, III, partners at Tom Scott & Associates, P.C., along with associate attorney Andrew DeYoung. Below is Part 2 of 3 of the transcript of the conversation.

Q: Can you mention some of the things you can protect and some that you cannot protect when filing for bankruptcy?

Chris Holmes: Real estate. If it is your residence, you can protect up to $19,300 of equity. If it’s a joint filing and the property is owned jointly by a husband and wife, they can protect up to $38,600. Sometimes, when only one of them files, the property owned by a husband and wife is totally off limits to the creditors. That comes in handy sometimes.

Q: Based on cases you’ve dealt with, what are examples of the types of property people will include in their bankruptcy filing?

Jess Smith, III: The cash value of life insurance polices.

Andrew DeYoung: 401k accounts. IRA accounts. It can be as general as the clothing on your back. It’s what the exemptions apply to.

CH: But inherited IRAs are not exempt.

JS: It’s complicated and that’s why you should consult with an attorney.

CH: In general, retirement accounts—IRAs, 401Ks, defined benefit pension plans—are exempt, off-limits, no matter how much money is in there. But there was a recent decision where someone inherited a person’s IRA. The person who had the IRA died; someone inherited the IRA. The person who died could have protected that in its entirety from his or her creditors, but when it was inherited by the recipient—the debtor— it wasn’t off-limits to the creditors. It became subject to being taken and liquidated for the benefit of the debtor’s creditors.

Q: Was this decision a case you worked on or a precedent-setting case?

CH: It was a precedent-setting case in the 7th Circuit Court of Appeals in 2013, Clark (debtor) v. Rameker (trustee), in which a decision was made by the judges that an inherited IRA is not exempt in certain circumstances. (ed., The Supreme Court affirmed this decision by unanimous vote in 2014: Funds held in inherited Individual Retirement Accounts are not “retirement funds” within the meaning of 11 U.S.C. §522(b)(3)(c) and therefore not exempt from the bankruptcy estate.)

JS: And there was the case of someone buying a new car on the eve of bankruptcy to protect the lien, or affecting the lien. If the creditor does not affect the lien on the title, sometimes the trustee can take the car itself.

CH: Right. I recently had a case where right before the people came in to sign the paperwork, just two days before, they went out and bought two cars. So I had to change the paperwork and their list of creditors, but then the problem was that we had to know for certain that the creditor had put their lien on the title to each vehicle—and they had to do that within 30 days of whenever the people got the car. Otherwise, in a Chapter 7 bankruptcy, or even in a Chapter 13, the trustee could void the lien, take the car and liquidate it. Unless we did something else to prevent that, we would have to wait 91 days from the transfer of the title to file the bankruptcy. Otherwise, it creates what’s called a “preferential transfer.” With that situation, a trustee could set aside that preferential transfer and try to confiscate and liquidate that car.

There is another recent precedent-setting case that has changed in bankruptcy law. Previously, when a house had been sold by the county treasurer for delinquent taxes, the debtor had one year to redeem the property—pay the taxes plus a rate of interest—to keep the house from going to the tax sale purchaser. In the bad old days, we would have to tell people, "You’ve got to file a Chapter 13 bankruptcy before the tax sale to get the benefit of the three- to five-year Chapter 13 plan, to cure that real estate tax arrearage and save the house. If the tax sale had occurred, we couldn’t use a Chapter 13 plan to give them three to five years to cure that problem. They still had this one-year statutory redemption period, but luckily one of our judges, Judge Carr, ruled that you can now use a Chapter 13 plan after the tax sale has taken place to force everyone to back off for three to five years, to give that debtor ample time to cure that arrearage. So that is a new development we can use to save houses after tax sales.

Part 1 of Interview: What’s New in Bankruptcy Law in Indiana

Part 3 of Interview: Accruing Post-Petition Interest on Unpaid Federal Taxes

What’s New in Bankruptcy Law in Indiana (Interview Part 1 of 3)

by

The official bankruptcy forms changed as of December 1, 2015, which will impact pro se debtors filing Voluntary Petitions. Mistakes made by pro se debtors include handling of tax refunds and submission of the document production form. Indiana bankruptcy exemption limitations have also changed.

Editor: We recently discussed the changes in the bankruptcy laws with Christopher Holmes, Jess M. Smith, III, partners at Tom Scott & Associates, P.C., along with associate attorney Andrew DeYoung. Below is Part 1 of 3 of the transcript of the conversation.

Q. What’s new in bankruptcy law in Indiana?

Chris Holmes: First of all the official bankruptcy forms changed as of December 1, 2015, so the forms are much more complicated. I think they require much greater sophistication. It’s probably going to impact the pro se debtor — the people who want to represent themselves in a bankruptcy. The forms are supposed to be simpler, but I believe they are much more complicated and perhaps will drive some people to attorneys to have them filled out properly.

Q: What are the different types of information that those forms are now asking people to include?

CH: The same information is being requested, but in a much more confusing way.

Q: Let’s start with that information. What types of information do the forms require?

Andrew DeYoung: The Voluntary Petition, for example, used to be a three-page document. Now, it’s an eight-page document. They’ve taken the old forms and added more language to read and understand, and it’s increased the size of the paperwork in a petition package to 23 pages per case. (Reference: United States Bankruptcy Court Southern District of Indiana Pro Se Debtor Packet)

Q: What kind of information is included in that Voluntary Petition?

AD: All of the property that a debtor owns; all of the creditors that a debtor owes money to; their income; their place of employment; and money they spend on a monthly basis for their household expenses, so it forces debtors to come up with a budget.

CH: People who think they can do it themselves might be fooling themselves, because the paperwork has become so much more complicated and the law imposes so many more requirements on debtors and their counsel to provide certain information and documents. I saw a story today where a woman was trying to do it herself. She had filed her tax returns, but then she had filed her bankruptcy before she had received and spent her tax refund money. So, the trustee was telling her that he was going to be suing her for his fair share of those refunds, because she had not received and spent them before she filed for bankruptcy. As of the date of filing, the refund was an asset of the bankruptcy estate, and the bankruptcy trustee, on behalf of all of the creditors, is entitled to take his fair share of it and distribute that money amongst the creditors. So, she didn’t know that, because she was doing it herself, and now her case is threatened with dismissal and her debts may never be dischargeable. She’ll be denied a discharge if she doesn’t turn over that money to the trustee.

Q: What other common mistakes do people make when they file for bankruptcy for themselves?

AD: We actually had a client, who retained us at our Shadeland Ave. office last week, whose petition I review at our free consultation. She had done everything correctly, but she paid a petition preparer to get it together, which cost her $300. She showed up at the meeting of creditors, but the trustee sent her home because she did not provide him with the document production form, which is required in Chapter 7 cases. So even though this particular person did everything correctly, it still resulted in the hearing not being held and her coming to retain us to get together her document production and fix the different things in her petition that a trustee may want to see perfected. So, she wound up financially in exactly the same place she would have been, minus $300, if she had just hired us to begin with.

Q: It sounds like cases in which people who file their taxes by themselves receive a letter from the IRS that states they owe thousands of dollar in unpaid taxes, plus interest and penalties, and then they hire an accountant to help them resolve the situation.

CH: Yes. I probably could do my own taxes, but I choose to pay someone to do it for me because it’s complicated and I want it done right. I like to use another analogy. I used to change the oil in my car. It’s doable, but I’d rather pay someone to do it because I want it done right, they can dispose of the oil more efficiently that I can, and I’m also afraid I might not get the lug nut in properly. Who knows what could happen then?

Also in regard to the bankruptcy forms is that the exemptions have changed. Indiana has a statute, Indiana Code 34-55-10-2: Bankruptcy exemptions; limitations, which tells people how much property they can protect from their creditors—or in the bankruptcy context, from the trustee who represents their creditors. Those numbers recently increased. It used to be you could protect $17,600 in equity and real estate; that number has gone up to $19,300. Or people could protect $9350 of tangible personal property; that’s now $10,250. So these are important details. Some people who represent themselves perhaps have valuable property that could be taken by the trustee. Like that tax refund situation, they could protect $400 of the tax refund now, as opposed to only $350 previously. There are some sections in the code that tell you some things that you can protect and some things that you can’t protect that are very critical in determining whether you file a Chapter 7 or Chapter 13 bankruptcy. That’s because something might be lost and liquidated in a Chapter 7, but you can pay your creditors enough money to protect those assets in a Chapter 13 case.

Part 2 of Interview: Property You Can Protect When You File for Bankruptcy

Part 3 of Interview: Accruing Post-Petition Interest on Unpaid Federal Taxes