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Should I Worry About a Creditor Challenging the Write-off of its Debt in Bankruptcy?

posted on 2.18 @ 5:46 pm

Most people know that some specific kinds of debts can’t be legally written off (“discharged”) in bankruptcy, like child and spousal support and most (but not all) taxes.  But you may have heard that sometimes creditors can challenge your ability to discharge even ordinary debts like credit cards and medical bills.  They can, under some circumstances.

From many years of working with our clients, we know that one of the best services we can provide is to help them understand what they DON’T need to be concerned about.  People filing bankruptcy are usually highly stressed and have been for a long time.  Knowing that some of their worries are unnecessary usually helps a great deal.  Such as knowing whether their bankruptcy is going to be challenged by a creditor or not.

Let’s put aside special debts like the support and taxes mentioned above, and secured debts—where there’s collateral like a house or car.  These present issues that are beyond the scope of this blog.  We are talking here about what you might hear being referred to as “general unsecured debts”—all debts where there is no collateral and the law does not treat them in any special way.

Simply put, whether you are filing a Chapter 7 or Chapter 13 case, these creditors usually do NOT raise any objections to your case, they generally do not challenge your ability to discharge their debts.  Most of the time they do not involve themselves in your bankruptcy case in any way that is visible to you after it is filed.

They legally can raise two kinds of objections, both relatively rare.

First, any of your creditors can challenge your ability to be in the bankruptcy case or get a discharge of any debts at all.  This is very rare, and involves allegations that you are hiding assets from the bankruptcy court, lying under oath, have transfers of assets without disclosing the transfers, and similar kinds of fraud in the bankruptcy process.  As long as you resolve to be honest with your attorney, and follow his or her advice about disclosing everything as required, this almost never happens.

Second, any one of your creditors can challenge your ability to discharge its specific debt, but only if the circumstances about that debt fits one of the specific exceptions to discharge.  These exceptions almost all involve allegations that you defrauded, misrepresented, or were deceitful towards the objecting creditor directly about the debt that is at issue.  Examples are over-limit credit cards, bounced checks, major credit transfers on a credit card or line of credit not long before filing bankruptcy, and getting public assistance such as unemployment benefits by lying about your employment history.

Most of the time when you figure some creditor is going to object to your bankruptcy or to the discharge of their debt—say, because of what the creditor’s representative said to you before your bankruptcy is  filed—it doesn’t happen.  It is usually simply not financially worthwhile for them to do so.  The most common exceptions are creditors with a personal axe to grind, like ex-spouses and ex-business partners.

The way to get peace of mind about what a creditor is going to do after your bankruptcy is filed is to tell all your concerns to your attorney.  Everything you tell your attorney is confidential, and you should be honest and be thorough.  That way you will have the relief of knowing what you don’t need to worry about.

Bankruptcy DOES Help Resolve Your Business Tax Debts

posted on 2.04 @ 11:02 pm

You might have heard that bankruptcy does not help with taxes, and especially not with business taxes.  That’s not true.  This is an area with many myths and misconceptions.  Let’s clear some of them up right now.

Myth: Bankruptcy does not write off some debts, and taxes are one of the categories of debts that it does not write off.

Truth: The first part of this is true: certain select kinds of debts are not written off, or “discharged,” when you file a bankruptcy.  And SOME taxes can’t be discharged, but others CAN.  The question of whether taxes can or can’t be discharged gets complicated because sometimes that depends on the facts.  We’ll dig into this a little bit below.  But very important: even those taxes that can’t be discharged can often be handled much more favorably in a bankruptcy case.  We’ll also show you how below.

Myth: Bankruptcy does not help with employee withholding taxes, the “trust fund” taxes you were supposed to pay to the IRS or the Oregon Department of Revenue after withholding them from your employee’s wages.

Truth: No kind of bankruptcy will discharge this category of taxes.  Admittedly this type of tax is treated quite strictly. After all this is money that, in a sense, was the employees’, for you to hold in trust until paying it over to the taxing authorities on behalf of the employees.  But a Chapter 13 case will give you years to pay off those trust fund taxes, WHILE keeping the tax authorities off your back, usually stopping the interest and penalties from accruing, AND often letting you pay less to your other creditors so that you can focus on paying off this one.  These are HUGE advantages.

Myth: Business taxes can’t be discharged (written-off).

Truth: Depends what you mean by “business taxes.”  If you ran a business as a sole proprietorship (or in a partnership) then the business would not separately pay income taxes—the income would flow through to you as personal income (after deducting the business expenses).  This “business” income tax would or would not be able to be discharged just like any other personal income tax. If you owed for a number of years of unpaid income taxes, a bankruptcy may well be able to discharge a substantial amount of those taxes.  That depends on a series of factors, including whether you’ve filed the tax return for that particular tax, if so how long ago the tax return was filed, when the tax was originally due, whether you tried to get a tax compromise, and whether you tried to evade the taxes.  And similar to what we stated above, if some of your tax debt is not dischargeable and you file a Chapter 13 case, your Plan will usually give you years to pay off those “nondischargeable” “priority” taxes, WHILE protecting you and your assets from the tax authorities, usually stopping the interest and penalties from accruing, AND often letting you pay less (and sometimes nothing) to your other creditors so that you can focus on paying these taxes.  Then when you finish your case and are out of the protection of the bankruptcy court, you will no longer owe any taxes.

CAUTION: This discussion assumes that you own or owned the business as a sole proprietorship or a partnership.  It’s a bit more complicated and some of these answers are different if your business was formed as a corporation or LLC.

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