Senior Citizens & Bankruptcy
Written by Canterbury Law Group

Senior Citizens & Bankruptcy

Bankruptcy is not always a good option for senior citizens who are having financial difficulties.

Older Americans filing for bankruptcy are not unusual when inflation and health care costs are rising. Furthermore, even though seniors have some benefits over other debtors, filing for bankruptcy is not the best option for people who stand to lose a lot of property. Learn more about other typical problems that senior citizens face when filing for bankruptcy by reading on.

One simple method to eliminate debt and increase the amount of money available to pay monthly bills is to file for bankruptcy. Still, a lot of seniors don’t feel comfortable declaring bankruptcy, and it’s not always a good idea or even necessary.

For seniors, filing for bankruptcy is questionable in the following two scenarios:

There is nothing that a creditor can seize from you. The items required to keep a house, like furniture, a small car, Social Security money, and numerous retirement accounts, cannot be taken by creditors. Since these items comprise the entirety of what many seniors own, many of them are “judgment proof,” meaning that declaring bankruptcy is not required. Nevertheless, some impervious to judgment will file to block creditor calls and get rid of the anxiety associated with losing money from a bank account. (See Also: What Is a Levy on a Bank Account?)
You are too wealthy to gain anything from filing for bankruptcy. In situations where your assets and earnings aren’t shielded from creditors, declaring bankruptcy might not be the best course of action. It’s likely that you would forfeit the property in Chapter 7. Because you have to pay for any property that you are not entitled to protect (but can keep), you would have to make a large Chapter 13 repayment plan payment in Chapter 13.

Discover the benefits and drawbacks of declaring bankruptcy for your financial situation.

Choosing the Right Time for a Senior to File for Bankruptcy
Bankruptcy isn’t always required or even advantageous, but for some seniors, it can be effective. Consider the following questions for yourself:

Do you have the kind of debt that Chapter 7 allows you to discharge?
Would you like a Chapter 13 repayment plan to help you catch up on unpaid mortgage or auto loans?
Can you protect all or most of your property with an exemption?
Will you be able to pay off enough debt to justify filing if you have to give up (or pay for) some property?
Will you have to pay on a monthly basis under Chapter 13 or is your income low enough to pass the Chapter 7 means test?
Other matters that seniors should contemplate are as follows:

Paying off credit card debt and medical debt. These are the two categories of debt that are most easily discharged in bankruptcy. Actually, qualifying debt can be eliminated in a matter of months by filing for Chapter 7 bankruptcy. But keep in mind that the creditor probably won’t be able to collect these bills anyway if you’re judgment proof.

Keeping your home’s equity safe can be difficult. Significant equity is held by many seniors in their homes. A certain amount of equity is protected by the homestead exemption, though the exact amount varies based on state laws. In order to settle debts with creditors, the trustee in Chapter 7 will seize nonexempt property, including home equity. (See the Homestead Exemption in Bankruptcy for further information.)

Safeguarding retirement funds. Nearly all tax-exempt retirement accounts, such as profit-sharing, 403(b)s, defined-benefit plans, and 401(k)s, are exempt in bankruptcy under federal bankruptcy law. To a certain extent, IRAs and Roth IRAs are also protected. You should consult a bankruptcy lawyer to confirm whether bankruptcy protection is available for your retirement. (See Your Retirement Plan in Bankruptcy for more information, including the current IRA limits.)

Safeguarding Social Security income. Your Social Security benefits are exempt (you can keep them) in bankruptcy, but only if the money stays in a different account. Your creditors cannot seize your benefits outside of bankruptcy. They become unprotected once they are mixed in with other money. Also, when completing the bankruptcy means test, your Social Security benefits are not taken into account as income for qualifying purposes. However, your Social Security income needs to be included in your bankruptcy budget and could still be used against you if your budget indicates that you have a sizable monthly disposable income. See Is Social Security Income Included in the Chapter 7 Means Test for additional information.

After they are taken out, retirement funds are not secured. Getting paid from your retirement account can also be difficult. When you file for bankruptcy, your retirement withdrawals are considered income for qualifying purposes and like cash for exemption purposes (most states don’t offer a significant cash exemption). A creditor may obtain these funds through a bank levy since, once withdrawn, they are no longer protected. Additionally, Social Security funds lose their protected status if they are combined with withdrawn retirement funds in the same account. Once more, keeping Social Security money in a different account is the best course of action.)

Written by Canterbury Law Group

Eliminating Tax Debts in Bankruptcy

Most taxes can’t be eliminated in bankruptcy, but some can.

If you’ve heard commercials offering the hope of eliminating tax debts in bankruptcy, be cautious. Bankruptcy lawyers regularly answer the question, “Does bankruptcy clear tax debt?” and the answer is always the same. “Sometimes.” The reality is eliminating tax debt in bankruptcy can be complicated. Before you file for bankruptcy, you’ll want to understand:

  • when you can discharge a tax debt
  • what happens to federal liens, and
  • how to manage tax debt using Chapter 13.

By the end of the article, you’ll understand why many filers continue to owe tax debt at the end of a Chapter 7 bankruptcy case and why most Chapter 13 filers must pay taxes in full through a Chapter 13 bankruptcy repayment plan.

When You Can Discharge Tax Debt

If you need to discharge tax debts, Chapter 7 bankruptcy will likely be the better option because it’s a quicker process and doesn’t require debt repayment. But Chapter 7 isn’t available to everyone. You must be eligible for Chapter 7 bankruptcy, and your tax debt must qualify to be wiped out with a Chapter 7 bankruptcy discharge.

Here are the conditions you must meet before eliminating federal income taxes in Chapter 7 bankruptcy:

  • The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
  • You did not commit fraud or willful evasion. If you filed a fraudulent tax return or willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can’t help.
  • The debt is at least three years old. The tax return must have been originally due at least three years before filing for bankruptcy.
  • You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing bankruptcy. (In most courts, if you file a late return (meaning your extensions have expired and the IRS filed a substitute return on your behalf), you have not filed a “return” and cannot discharge the tax. In some courts, you can discharge tax debt even if you filed a late return if you meet the other criteria.)
  • You pass the “240-day rule.” The IRS must have assessed the income tax debt at least 240 days before you file your bankruptcy petition, or not at all. (This time limit could be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

Even if you meet these conditions, you might be out of luck if the IRS has already put a lien on your property (more below). Also, some jurisdictions have additional requirements.

For instance, in the ninth district, you must file your tax return in a timely fashion, and filing late precludes a discharge. Also, in Chapter 7, if you paid off nondischargeable tax debt using a credit card, the credit card balance will be a nondischargeable debt if a creditor challenges the dischargeability by filing an “adversary proceeding” or bankruptcy lawsuit.

You Can’t Discharge a Federal Tax Lien

Your victory might be bittersweet if your taxes qualify for discharge in Chapter 7 bankruptcy. Why? Bankruptcy won’t wipe out prior recorded tax liens. All Chapter 7 bankruptcy will do is wipe out your personal obligation to pay the qualifying tax and prevent the IRS from going after your bank account or wages.

But if the IRS recorded a tax lien on your property before the bankruptcy filing, the lien will remain on the property. You’ll have to pay off the tax lien before selling and transferring the property’s title to a new owner.

Managing Tax With Chapter 13 Bankruptcy

Filing your tax return might not be as burdensome once you realize that using Chapter 13 bankruptcy to manage your tax debt can be a smart move. Here’s why:

  • Dischargeable taxes (generally those older than three tax years) might be forgiven without any payment, depending on the amount of disposable income you have after your reasonable and necessary expenses are deducted from your pay.
  • Dischargeable taxes won’t incur additional interest or penalties (but you’ll pay interest on nondischargeable tax).
  • You can satisfy an IRS tax lien through the Chapter 13 plan by paying what you owe.
  • The IRS is obligated to abide by the plan as long as you include all your outstanding income tax and keep your tax returns and post-petition tax obligations current during your Chapter 13 plan.
  • Bear in mind that any nondischargeable tax that won’t go away in bankruptcy (generally, those incurred during the last three tax years) must be paid in full during the three- to five-year Chapter 13 plan. You’ll be caught up on taxes and most or all of your other debt when it’s over.

Unlike Chapter 7, in Chapter 13, you can discharge a credit card balance incurred due to paying off a nondischargeable tax debt. Learn more about tax debts in Chapter 13.

Should I File for Bankruptcy Before or After Taxes?

You won’t gain any real advantage by waiting to file your income tax return until after you file a bankruptcy case. But, there are many reasons you’ll want to be current when filing your Chapter 7 or Chapter 13 matter.

Tax Returns and Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, the trustee assigned to oversee your case will ask for your most recently filed tax return. That doesn’t necessarily have to be the tax return for the last tax year, but the trustee will ask for a written explanation if it isn’t the most recent return.

The trustee will compare the income you report on your return to the amount listed in your bankruptcy paperwork. If you show that you’re due a refund, the trustee will also want to check that you have the right to protect or “exempt” it and that you’ve claimed the proper exemption amount. If not, you’d be required to turn the refund over to the trustee, who would, in turn, distribute it to your creditors.

Many people plan to use the return for necessary items such as living expenses before filing a bankruptcy case. If you choose this approach, keep records of your expenditures.

Tax Returns and Chapter 13 Bankruptcy

You must be up to date on your tax returns before filing a Chapter 13 case, but the rules allow you a little wiggle room. You’ll provide copies of the returns for the previous four tax years to the Chapter 13 trustee before the 341 meeting of creditors (the hearing that all filers must attend).

If you’re not required to file a return, your trustee might ask for a letter, an affidavit, or a certification explaining why. Sometimes local courts will impose additional rules for documents in their districts.

If you owe the IRS a return but don’t file it before your 341 meeting of creditors, things can happen to derail your case.

  • A motion. The trustee will file a motion giving you a brief period to provide your returns. If you miss the deadline, the court can automatically dismiss your case, leaving you no chance to plead your case to the judge.
  • A substitute return. The IRS might file a “best estimate” claim based on your past income. The problem? IRS estimates are almost always higher than what you’d owe after filing a proper return.

Source: https://www.nolo.com/legal-encyclopedia/bankruptcy-tax-debts-eliminating-29550.html

Written by Canterbury Law Group

Why You Should Not File for Bankruptcy

In some circumstances, filing for bankruptcy is the only solution to deal with your financial crisis. For others though, bankruptcy is actually a bad idea and should be avoided.

Each situation will be different, depending on how much debt you have and what kind of debt it is. It’s essential that you seriously think about the benefits and downfalls of bankruptcy, and see if it is the best solution for your current situation.

Your top bankruptcy attorney in Scottsdale is ready to help you with all of your bankruptcy needs. First, though, see if your reason for bankruptcy is a good one.

Cannot Pay Small, Unsecured Debt

Unsecured debt is commonly known as past due to credit cards. It’s debt that has no outstanding collateral for the credit card company to seize from you. That means the lender lets you spend as much as you want without tendering any security in case you default on the loan. If you do default on your payments, there is nothing for the lender to repossess.  While they certainly can sue you, that again only gets them a judgment.  Eventually, that judgment will likely lead to garnishment of your banking accounts and a paycheck.

This isn’t to say that you can stop paying small loans and you’ll be fine. There are still issues involving your credit and the chance of the lender suing you in court. However, this is not a good reason to claim bankruptcy. In many cases, you or your bankruptcy lawyer can negotiate with the lender to set up a payment plan that works for you, or to pay a lump sum to clear up the debt.

There are also occasions in which the lender may write off your debt as uncollectable, but that isn’t a solution to rely on.

Student Loans, Income Tax, Court Judgment, or Child Support

Bankruptcy doesn’t necessarily erase all of your loans. In some cases, bankruptcy won’t help you with certain loans. Depending on what you owe, each situation is treated individually.

Filing for bankruptcy for debt like student loans, income taxes owed, certain court fines or penalties and child support won’t do you any good. There may be extreme cases when bankruptcy can quash this kind of debt. For the most part, though, bankruptcy can’t do anything about these types of debt.

Stop Collection Agencies from Calling

If you are wary of collection agencies calling you all the time, there’s an easier way to make them stop than filing for bankruptcy. Through the Fair Debt Collection Practices Act (FDCPA), if you request them to stop calling, they must oblige under federal law.

Send a written letter to the collection agency stating you do not want them to contact you anymore. If they continue to call after your request, keep a record of the phone calls, you can sue the collections agency later and potentially collect damages and fees.

Want to Restart

If you’re looking at bankruptcy as an easy way out of your debt, you may want to reconsider that mindset. For starters, there will be certain debts as we mentioned that will never go away after filing for bankruptcy.

Filing for bankruptcy is also hard on your credit. Bankruptcy remains on your credit record for up to ten years. That means if you want to take out a loan for a new vehicle or a mortgage, you may have a hard time being approved for many years to come.