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May 2011

After bankruptcy. Help! They're suing my LLC!

Posted by / in General Information About Bankruptcy Law / 16 comments

Many people who file bankruptcy are small business owners.  Especially owners of one-person small businesses.  People like the freedom of being their own boss, but it can be a tough way to make a living.

small business

Operating a small business can be a tough way to make a living

A lot of those small businesses are set up as corporations or LLC’s.  Why?  People have heard that they are not liable for the debts of their business if they incorporate.   That’s true.

(Now starting out, nearly everyone you do business with will want you to sign a personal guarantee.  So that protection doesn’t go as far as you’d like.  And those personal guarantees for a lot of people are the reason for the personal bankruptcy.)

The advantage of setting up a corporation or LLC turns against you, if you have to file bankruptcy.  Why?  Just like you are not liable for the business’s debts, the business is not covered by your bankruptcy.  You are not the corporation; the corporation is not you.

That hits home hard after the bankruptcy, when creditors keep sending bills, or even send court papers, in the name of your corporation or LLC.   What to do?

Well, if the business is closed, do nothing!  Go back to square one.  Why did you set up the corporation or LLC in the first place?  Because you are not liable for the corporation’s debts.  So if they bill the corporation, you don’t care.  If they sue the corporation, you don’t care.  That was the whole point.  You are not the corporation.  You are not liable for the corporation’s debts.

If the business is closed, why do the bills keep coming?  Why would collection agencies go after closed businesses?  To scare people–specifically to scare people into paying.   The key thing here is, don’t be scared into paying.

“I’ve filed bankruptcy, so I don’t have to pay.  The XYZ Company is out of business, so it can’t pay.”  Keep those two things in mind and you’ll be fine.

(Suppose you are still operating.  Now that’s trickier.  We need to talk about that in person.  If you had a lawyer, accountant or business advisor when you started up, you need to go back to that person again, too.  It’s really important to do that right.)

But if you have closed, then it’s simple.  You don’t care.

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Apr 2011

Does bankruptcy help with inherited debt?

Posted by / in General Information About Bankruptcy Law / No comments yet

“Do I need to file bankruptcy on inherited debt?”

In my twenty years as a bankruptcy lawyer, I’ve been asked about bankruptcy and inherited debt maybe four or five times.

Someone’s mother or father passed away, leaving nothing but credit card and medical bills.  What to do?  Does bankruptcy help?  Most people know that you don’t need to file bankruptcy–because you can’t inherit debt in America. I never thought I’d need to talk about it in my bankruptcy blog.

(Unless you were already a co-signer, collectors cannot come after you for the bills of your mother or father.   At least they shouldn’t.)

So I was surprised by a news release posted on the internet March 31, 2011.  Debt collector Phillips & Cohen brags about their leadership in collecting “deceased account recovery.”  Deceased account recovery?

Now if someone dies and leaves a probate estate, legitimate creditors should be paid.  That’s one of the things that Phillips & Cohen says they do, on their website.

They also say they have “effective family … communication.”  What’s that???

The Fair Debt Collection Practices Act says that a collector cannot communicate with anyone other that the consumer debtor or spouse or attorney or the credit bureau.  The only exception is to obtain “location information.

So I’m not sure how these people–who are clearly collectors–communicate with family.  They aren’t trying to locate someone they know is deceased.  Doesn’t any other communication instantly violate the FDCPA?

If a loved one dies and leaves a probate estate, creditors should be notified and legitimate debts should be paid.

But if they leave nothing, you do not inherit the debt.  Don’t let anyone tell you that you do.

There’s no need to file bankruptcy.

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Mar 2011

Bankruptcy can discharge some old income taxes.

Posted by / in General Information About Bankruptcy Law / 5 comments

People often ask me if there are any taxes that bankruptcy can help with.

Here’s the rule.  You can discharge income taxes if they were due more than three years ago, if you filed them close to on time, and if the tax has been assessed for more than 270 days.

Bankruptcy can discharge taxes three years after they were due... But they have to have been filed almost on time.

When are your taxes due?  April 15 usually.  Later, if you got an extension.  (Virginia state taxes are due May 1.)  So, your 2007 Federal income taxes were due April 15, 2008.  Three years after that is April 15, 2011.  That’s the three year rule.  (Unless you got an extension.)

Filed almost on time.   The law says they have to have been filed for at least two years, but you can’t always  count on that.  For example, suppose you filed your 2002 taxes in April 2009.  Could you discharge those taxes in bankruptcy filed April 18, 2011?  No!  You meet the three year and two year rules, but something else trips you up.

What trips you up is this:  You can’t discharge taxes if you “willfully attempted to evade” the tax.  How does that work?  Basically, when the IRS gets mad that you haven’t filed your tax return, they file one for you.  (It’s called a substitute for return.)  They guess how much you owe, so they can go after you for it.   If the IRS files a substitute for return, they classify you as a willful evader.  Filing a correct return later doesn’t get you out of that.  You are a willful evader.  You can’t discharge that year’s tax.

That’s why I say, bankruptcy can discharge taxes if it’s three years after they were due and filed almost on time.  (Almost on time, meaning “more than two years ago” and “before the IRS filed a substitute for return.”)

Some people no longer remember whether they filed on time.  (Or at all).  You can call the IRS and find out.  Call 1-800-829-1040.  (You have to “listen carefully to our menu options.”  Expect to sit on hold for maybe half an hour.  When you get through, you need to order an “account transcript.”   They will mail or fax it to you.

The account transcript shows when the taxes were due, when the IRS shows they were filed, and if they filed a substitute for a return.

(There’s another transcript the IRS has, called a “literal transcript.”  The “account transcript is the one you want.”)

What’s this about assessed?  Taxes are usually assessed when you and the IRS agree they are due.  So when you send in your tax forms and they show you owe money, the taxes are assessed right then.  The 270 day rule can come up  as a correction or an audit.

If the IRS gets a W-2 for a job you forgot to include, that tax is assessed later.  Or they they audit your business, and say you owe more money.

If you are arguing with the IRS, then you delay the date of the assessment.   Then the date of the assessment isn’t until you and the IRS agree, or until you have exhausted your ability to fight.  So if the IRS hits you with an audit and you are planning to file bankruptcy anyway, you want to agree, and not fight, to get the 270 days ticking.  (You for sure need to talk to a tax professional if you are facing something like this.)

What about business taxes?  What the IRS calls trust fund taxes is what most people mean when they say business taxes.  You owe trust fund taxes on money you withheld from your employees’ paychecks–and then did NOT send in to the IRS.  Bankruptcy can’t help with those.  (The IRS considers that money you basically stole from them.  They don’t let you off the hook for that.  Ever.)

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