Back when the bankruptcy laws were changed in 2005, a hard calculation was implemented, based on household income and household size, to determine whether or not a bankruptcy filer was making a “decent” living, and should be disqualified from discharging debts completely in Chapter 7 without repayment. This hard calculation has been dubbed The Means Test–i.e., Does the filer have the means available to repay at least a portion of their debts in a Chapter 13 payment plan? If the answer to this fundamental question is “yes”, then filers risk dismissal of their Chapter 7 case for “abuse.”
Passing the Means Test and Still Having Problems
What is perplexing to some prospective Chapter 7 filers is this: You can still “pass” The Means Test, but still run afoul of qualifying for a Chapter 7 bankruptcy case. The converse is also true: You can “fail” The Means Test, but still qualify for a Chapter 7 bankruptcy case. The Means Test is simply a burden-shifting mechanism. If you “pass” The Means Test, then there is a presumption that you qualify for Chapter 7 and anyone that disputes that fact has the burden of proof to demonstrate that you do not qualify. If you “fail” The Means Test, then there is a presumption that you do not qualify for Chapter 7, and now the burden of proof is on you to demonstrate that you do qualify for Chapter 7. In short, The Means Test is not as straight forward as most would like it to be.
Two Time Periods for Analyzing Chapter 7 Income
Income, for the purposes of Chapter 7, is analyzed within TWO different time periods. First, The Means Test measures the total “regular” income received in the six months prior to the Chapter 7 bankruptcy filing and averages that income (less social security types of income). Second, the “present day” income that exists on any given day during the administration of the Chapter 7 bankruptcy case is also taken into account.
Example: You’re Employed Leading Up to Bankruptcy
Example 1: If you have been employed leading up to filing bankruptcy, were making a good wages, were suddenly terminated, and then filed for Chapter 7 right away, there is most likely a “presumption” that you do not qualify for Chapter 7 based on your historical income–i.e., you will “fail” The Means Test. The reality is, though, you do qualify, because, as of the filing of the case, you are unemployed, and you do not have the means available to repay creditors in a Chapter 13 payment plan. So, the “present day” income dictates that you should be able to rebut the presumption that you do not qualify for Chapter 7. In this situation, you simply need to demonstrate to the US Trustee that you are not employed, have no pending prospects of future employment, and you do not have the ability to repay creditors in Chapter 13.
Example: You’ve Been Unemployed for 6 Months
Example 2: You have been unemployed for 6 months, only earning unemployment compensation. You file for bankruptcy and “pass” The Means Test easily. Two weeks after filing, you get a job making $150K a year. On the last day of your Chapter 7 case, the US Trustee files a motion to dismiss your case for abuse. This is a real-life fact pattern. Yes, The Means Test was “passed”, but the “present day” income dictated that my Client had the means available to repay at least a portion of the debt in a Chapter 13 payment plan.
What Happens to Tax Debt in Bankruptcy?
Will Bankruptcy Help With Tax Debts?
In some cases, bankruptcy can eliminate back taxes owed to the IRS as well as to state governments, however the devil is in the details. It is certainly not easy to eliminate tax debts in bankruptcy court. If your taxes don’t qualify for discharge and you file for bankruptcy, the IRS will be waiting for you on the other side with additional time to collect your taxes. Under normal circumstances, the IRS has ten years to collect tax bills, penalties and interest from you. Filing bankruptcy temporarily freezes IRS collection efforts, but the IRS then tacks on the 4-5 months bankruptcy period plus 180 days to their collection window. In essence, a bankruptcy filing that doesn’t discharge tax debts will give the IRS close to an extra year to chase you for back taxes.
So when can back taxes be wiped clean by a bankruptcy filing? There are three basic timing rules that apply:
Rule #1: The Three Year Rule
Your tax debts must be three years old from the date they were due. Note that this does not mean from the date you filed. Every year, tax returns are due for most Americans on April 15th. This means that your 2004 taxes are not eligible for discharge until April 15th of 2008. This is the case because your 04′ taxes weren’t technically due until April of 05′ and you calculate the three year period from that point forward.
Rule #2: Your Tax Returns Must Have Been Filed for Two Years Before Bankruptcy
This is where the IRS really puts the debtor between a rock and a hard place. The government knows all too well that many who have fallen behind on their tax bill have also failed to file tax returns. Requiring that the actual returns be filed for two years prior to the bankruptcy prevents seriously delinquent taxpayers from filing late returns one day and bankruptcy the next.
Rule #3: the Tax Must Have Been Assessed More Than 240 Days Ago
This will likely be the easiest requirement to satisfy and essentially requires that the IRS or state taxing authority has formally determined that you owe the taxes you’re trying to get rid of in bankruptcy more than 240 days before you file paperwork with the court. Note that an offer in compromise will delay the 240 day rule while it is pending plus an additional 30 days.
What About Tax Liens?
A tax lien is a public filing that the IRS uses to put the world on notice that you owe them money. Filing for chapter 7 bankruptcy will only eliminate your personal obligation for tax debts, not tax liens that have attached to your property. Any lien recorded prior to your bankruptcy case will survive the filing.
Free Consultation with a Utah Bankruptcy Attorney
If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed over a thousand cases. We can help you now. Come in or call in for your free initial consultation.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
Chapter 7 Lawyer
It can be a difficult realization to face the inability to repay your debts. When there is no other recourse for settling your debts, applying for a Chapter 7 may a good option. Once you have made the decision to petition for bankruptcy, it is important to find a good chapter 7 lawyer, who will help you navigate the associated legal proceedings.
In Utah, Chapter 7 is filed at the United States Bankruptcy Court, District of Utah.
It may seem counterproductive to your financial situation to pay expensive lawyer’s fees to help you settle your debts, but a Chapter 7 Lawyer can sometimes do a better job of settling debts and stopping foreclosures or wage garnishments in the event that you cannot immediately repay your creditors.
There are several different legal categories associated with bankruptcy filings; Chapter 7 is the most common form of bankruptcy filing in the United States. Both businesses and individuals may file for this type of bankruptcy. Unlike the other forms of bankruptcy, which allow for reorganization to repay creditors, Chapter 7 governs the liquidation of assets in an attempt to repay debts. When beginning the search for a Chapter 7 Lawyer, you will need to consider the costs, which will include the fees associated with having a bankruptcy lawyer to help settle your case.
Sometimes it is very simple to find a good Chapter 7 lawyer to handle your case; most people will find a suitable lawyer through word-of-mouth recommendations from their friends and family. Most people will not have any trouble finding the appropriate counsel for their bankruptcy case. However, there are some extreme cases, which will require a more experienced lawyer who can handle large amounts of debt and assets. A free consultation with a bankruptcy lawyer can help you and the lawyer understand one another’s expectations and how much time it will take to complete the bankruptcy filings.
The lawyer’s fees will be based on the amount of time they must spend on the case, as well as the amount of debt involved with the bankruptcy. During this free consultation visit, it is best to gather as much information about your debts as possible. The lawyer will need this information to evaluate your case and begin filing any paperwork associated with the bankruptcy. This visit is also important because you should have confidence in your legal counsel, and if you are not confident in the lawyer’s abilities upon the first visit, then there is no obligation to hire them.
Chapter 7 is ideal for businesses and individuals with a lot of assets or divisions of their business. During a Chapter 7 bankruptcy, the lawyer works with a trustee to sell the individual’s or business’s assets. It is ideal to have a lawyer in this instance because the lawyer must help the debtor prove their assets, which will help the court determine if they have satisfied the terms of their bankruptcy filings. Filing for bankruptcy can carry a lot of confusion, but a good bankruptcy lawyer can help alleviate some of this stress. Chapter 7 lawyers can help with the most difficult cases, especially if you have a lot of assets.
Conclusion on Chapter 7 Lawyer
If you have a bankruptcy question, or need to file a chapter 7 case, you should contact Greg Lyle at (801) 676-5506. Greg regularly files chapter 7 bankruptcy cases for his clients. Greg can help you now. Come in or call in for your free initial consultation.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506