Tax Debt and Chapter 7

Tax debt, Tax liens, and Chapter 7 bankruptcy

In a chapter 7 filing, most of the debtor’s personal obligation to pay their debts will be discharged.  Several of the debts that are generally non-dischargeable are domestic support obligations, fines, restitution, student loans, and taxes.  Along with other aspects, the relief of tax debt using the bankruptcy code is a widely misunderstood process.  There is a misconception that most taxes can be eliminated in bankruptcy, which is often not the case.

Although it is a general rule taxes are considered non-dischargeable, certain taxes may be discharged if they meet all of the qualifying conditions:

A)  They are income taxes.  Taxes such as payroll or unemployment taxes will never be discharged;

B)  The taxes were filed timely and at least 2 years prior to the bankruptcy;

C)  The taxes were not filed with fraudulent intent or willful evasion.  For example, taxes with a fraudulent social security number or filed with information in a willful attempt to evade paying taxes are never dischargeable;

D)  The IRS tax assessment was at least 240 days prior to the bankruptcy filing; and

E)  There has been no offer in compromise related to the tax debt.

If the tax debt meets all the above criteria, it may qualify for discharge in a chapter 7.  However, if any of tax debt has an associated IRS tax lien, the lien could survive the bankruptcy.  In other words, your personal liability to pay the debt will be discharged but a lien against your property, including real estate, personal property, and financial assets, will protect the IRS’ interest in the amount owed.  With several exceptions, IRC section 6502(a) (1) establishes a statute of limitation collection period of 10 years on a tax lien.  The tax lien is only applicable to the assets you had at the time the lien was filed.

If a tax lien survives your dischargeable tax debt, there are still options.  Several of these options include an offer in compromise, discharge of the property which allows you to sell property free of the lien, lien subordination which doesn’t remove the lien but modifies its priority and can be useful in getting a loan or mortgage, or you can let the statute of limitation run if there is little to no equity, value, or IRS interest.

Have tax debt? We can help. Our free consultations allow you access to the best legal advice we can offer to help guide you to your best choice. We want you to make the most informed and educated decision on debt relief and feel confident in that decision, whether it is bankruptcy or an alternative to bankruptcy.  Contact us where an experienced bankruptcy lawyer can help start your way to a fresh start.

Call Attorney Kurt G. Larsen at 312-909-1128 or email us today.

Business Owners And Personal Bankruptcy

A number of businesses are funded by lines of credit or personal assets supplied by the business owners. These are used to fund both startup costs as well as the daily operational expenses of the business. However when faced with financial losses and no means to pay off these huge debts, bankruptcy is often seen as way out. For business owners who have used both personal as well as business credit, it is open difficult to decide whether to file for personal bankruptcy or business bankruptcy. Setting simple goals will ease the process and help in restructuring or removing debt.

The first step in the process is obtaining credit reports for your business as well as your personal credit report. There are a wide variety of services that will assist you in obtaining these credit reports. To obtain your business credit reports you can use Dun and Bradstreet or Experian. Personal credit reports can be obtained from Equifax.

Secondly, create two lists. On the first list, write down all your business debts as well as business assets. On the second list you will do the same thing but this time list only personal debts and personal assets. Ensure that all business debts are associated with your business tax ID number, if you can’t do that, then it has to be listed as a personal debt.  Also circle which business debts, if any, were personally guaranteed by you as an individual.

The third step is meeting with a bankruptcy advisor to discuss your options. Ensure that you carry both lists with you to the meeting as well as both your personal and business credit reports. If you are a party to any lawsuits, a pending divorce, or other legal proceedings, then make sure the bankruptcy professional is aware of this as well.

Your discussions with a bankruptcy professional will advise you as to your best option based upon your particular circumstances. You will be considering all of the various bankruptcy options, along with any alternatives to bankruptcy. The most popular personal bankruptcy options are chapter 7 and chapter 13 filings. Popular business bankruptcy options include Chapter 7 and Chapter 11.  It is important that you discuss these options fully with your bankruptcy professional to assist in making the choice that is right for you, right for your business, the best route out of your predicament, and allow you to see the light at the end of the tunnel.

Call Attorney Kurt G. Larsen at 312-909-1128 or email us today.



What Property You Can Keep in Illinois

Most people realize that bankruptcy does not force you to give up everything. But what exactly can you keep?  You might be able to keep your house and your auto, but it depends on the equity.  In Illinois, with a “homestead exemption” you can protect your house, and are allowed to keep up to $15,000 of equity in the property (this doubles for a couple).   In terms of your car, you are allowed to protect up to $2,400 of the vehicles value.  In many instances, it is also possible to keep paying on an existing car loan after the bankruptcy proceedings.

In Illinois, there are also entitlements and other payments made to you that are excluded from the proceedings and you get to keep these.  This includes money you are receiving from a workers’ compensation claim, any disability payments, unemployment, social security, veterans’ benefits, retirement plans, life insurance as well as personal injury and wrongful death settlement/verdict money.  You are also allowed to keep any other miscellaneous personal property up to $4,000  in value with the “wildcard exemption”.


Review of Estate Planning Basics

In the state of Illinois, you need to be at least 18 years of age to make a valid will.  You also need to be of sound mind and memory.  The will must be in writing and must be witnessed by at least two people who cannot also be beneficiaries.  A will allows you to distribute property, select a guardian for any minor children and name an executor.  The executor oversees the process of moving your will through probate and distributing your property.  Changes in your life that should bring about a review of your will include marriage, divorce, the birth or adoption of a child, new property ownership or relocating to another state. Changes to an existing will are known as codicils.

The most significant decision made in any estate planning instrument is usually whether property you want to leave should be put into a trust, before (or after) your death.  Most people want to avoid dying without a will, which is known as dying intestate. In Illinois, this means your assets will be divided equally among your immediate family.  For example, if you have a surviving spouse and only one child, each will be given 50% of your remaining assets.  Since this statutory distribution is not always what one intended, a consultation with an attorney to make sure your wishes are followed is highly recommended.


Gift Tax Issues Coming to Illinois?

The IRS is looking for back taxes owed in a new pilot program they are starting in selected states.  Experts believe large metro areas, such as the Chicago area, might be slated.  They are basically tapping into large, easy to access data sources to locate any new sources of income for Uncle Sam.  What are they seeking?  Property transfers that involve unpaid gift taxes.

The law allows you to transfer up to $13,000 to anyone without filing any special paperwork.  But think back to any properties or assets you transferred above this value and make sure you filed a Form 709 or gift tax return, if needed.  Note that there is no such thing as a joint 709 form, so married couples need to file separately.  If your transfer has been to a living trust or other revocable grantor trusts, those transactions don’t trigger gift taxes.

Estate Law:
Removing a Personal Representative

Because some “executors” (the person a will designates to manage things) cannot serve and courts appoint “administrators”, we often classify anyone performing such duties as a “personal representative” of the estate.  Many heirs and beneficiaries have issues with how an estate is being managed.  Here is a quick checklist of things you need to be aware of when considering the removal of a personal representative:

  • First, know that he or she should have been given “letters” granting them approval by the court to act in this capacity.
  • Before a personal representative (who voluntarily resigns) can be replaced, they must provide a written resignation to the county clerk after giving at least 15 days notice to all interested in the estate.
  • Realize that state laws create “hierarchies” to determine which individuals have priority to be appointed as personal representatives.
  • In Illinois, the conviction of a felony is a cause for removal.
  • Also in Illinois, someone who conceals oneself “so that process cannot be served” can also be disqualified.

Other grounds range from the obvious, such as “intentional misrepresentation” of material facts or inability to discharge duties – to the more subjective, such as “when removal is in the best interests of the estate”.

The most productive “first step” is to engage an attorney and have them speak to the personal representative (or their attorney who is helping them manage the estate.)  In many instances, you can avoid a drawn out legal proceeding by simply expressing your concerns through professional channels.  This eliminates the emotion that is often involved and there is less chance of things escalating.  Since the personal representative realizes their approaching a legal confrontation, they might simply resign or alter their practices sufficient to make everyone happy.