Bankruptcy Frequently Asked Questions (FAQs)

 

Q.  Who Qualifies for a Chapter 7 Bankruptcy Fresh Bankruptcy Start?

A:  A Chapter 7 Consumer Bankruptcy Petition may be filed by an individual or married couple and is intended to give the debtor the opportunity for a fresh start.  Generally, whether you qualify for a Chapter 7 Fresh Start can be determined by comparing your family size and income to the median income in your State, which is known as the Means Test.   The determination of whether you qualify for a Chapter 7 Bankruptcy is a complicated legal matter and should be reviewed with an attorney experienced in New Jersey Bankruptcy cases.

Q. What if I do not qualify for a Chapter 7 Bankruptcy or I have substantial equity in my home?

A:  A Chapter 13 Bankruptcy may enable you to reduce the amount you must repay to your creditors and allow you to repay it over a five year period at no interest.

Q:  If I file a Chapter 13 Bankruptcy, will I be required to repay all of my debt?

A:  In a Chapter 13 Bankruptcy, in most cases, there is no requirement that you repay all of your debt.   In a Chapter 13 Bankruptcy, the amount you are required to repay to your creditors is based on the Court’s determination of your available income after paying your reasonably necessary monthly expenses or through non-exempt assets.

Q. Can Bankruptcy Provide Individuals, Married Couples and Businesses With a Means to Deal With Delinquent Taxes?

A: A personal bankruptcy may be an effective way to address significant personal tax issues. For individuals (or married couples) who owe federal and/or state income taxes, a Chapter 7Chapter 11, or Chapter 13 Bankruptcy may provide an alternative to going through difficult and costly programs directly with the taxing authority.

Q. Are any delinquent taxes dischargeable in a Bankruptcy?

A:  A common misconception is that all taxes of any kind are not dischargeable in a bankruptcy case. Some taxes actually are dischargeable in bankruptcy, including personal income taxes that are more than three years old. Fiduciary taxes are generally not dischargeable. The Bankruptcy Code’s provisions relating to taxes are very complex, and differ by chapter or type of bankruptcy that you file.

Q. How can bankruptcy provide for the repayment of taxes which cannot be discharged?

A: It is often the case that the bankruptcy case allows for debtors to “catch up” on their tax obligations. Because the bankruptcy code requires that debtors in Chapter 13 cases be “current’ in the filing of their tax returns, the bankruptcy case offers an opportunity to review complete tax records and determine what remains due and if any portion of past due taxes, interest, and/or penalties, may be discharged. Even if amounts are due (including those that result from a federal tax lien), a reorganizational bankruptcy under Chapter 11 or 13 provides a framework to propose a repayment plan to the IRS, while having the opportunity to determine which taxes must be repaid.

Q. Will a bankruptcy affect my future tax filings?

A: Some people also believe that filing a bankruptcy may affect their tax filings in the future. Generally, most individuals (or married couples) continue to file their personal tax returns in a normal manner and to ensure than where taxes were owed in the past, the taxing authority properly applies any refund.

Q. What are Trust Fund Taxes and how can a Bankruptcy Help with them?

A:  Trust Fund Taxes are taxes that are held “in trust” by a business for the benefit of a federal or state taxing authority. Generally, these are Federal Withholding (or 941) taxes or State Sales and Use taxes which are to be collected by the business and paid to the taxing authority.   Trust Fund Taxes are generally deemed to be non-dischargeable and are a debt of both the business and the responsible members of the business A Chapter 11 or Chapter 13 Bankruptcy may allow a business or individual to repay Trust Fund Taxes and avoid Federal and State Tax Liens and collection.

Q. Is the debt discharged in bankruptcy “income” that has to be reported on my income tax return?

A:  While typically “cancellation of debt” may be deemed income to a debtor for the purposes of  Federal income taxes, a debtor who has received a Discharge in a Chapter 7 Bankruptcy case cannot be deemed to have earned such income.  Even if creditors issue a 1099C (Cancellation of Debt) Form, any of the discharged debt is not deemed to be income for federal tax purposes.  This differs from the Internal Revenue Code Exception for Cancellation of Debt where a tax payer is deemed to be “Insolvent”.  IRS Publication 4681 clarifies that debts canceled in a Title 11 Bankruptcy case are not included in your income if a debtor is under the Jurisdiction of the Court and the cancelation of the debt is granted by the Court.

The information set forth above is not legal advice which can be provided to you only after a full review and evaluation by an attorney of your particular circumstances and the remedies which may be available.