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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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Feb 2011

Bankruptcy discharge or "charge off?" What’s the difference?

Posted by / in General Information About Bankruptcy Law / 160 comments

Discharge?  Charge-off?  The two words look a lot alike.  Do they mean the same thing?

Nope.  Discharge is a magic word.   A legal word, anyway.  At the end of your bankruptcy case, you get a bankruptcy discharge.

The bankruptcy discharge is a court order that the people you owed money to cannot do anything to collect those debts from you.

(If the debts are attached to your house or car, they can still go after the property; but they cannot go after you.)

bankruptcy judge

The bankruptcy discharge is a court order that the people you owed money to cannot do anything to collect those debts from you.

The bankruptcy discharge is a court order that the people you owed money to cannot do anything to collect those debts from you.

The purpose of the bankruptcy discharge is to help you get a new start.

Charge-off” is an accounting term.  It’s an accounting term that also shows up on your credit report.  Charge-off means you are probably not going to send in next month’s payment.

Why is that important?  A “charge off” is very important to the bank.  The Federal Reserve keeps close track of charge offs.  The Federal Reserve (and other regulators) wants to be sure that each bank has enough money to cash checks that people might bring to the bank each day.  When it comes to figuring that out, probably the next payment on your charged off debt won’t be there.  The Federal Reserve will close banks that can’t cover their checks, so the bank better make sure some other money is there since yours won’t be.

How is the charge off important to you?  The bank or credit card company puts a “charge-off” on your credit report.  Having a charge off on your credit is a “major derogatory.”  Major derogatory are the worst things you can have on your credit report.  Plus, you still owe the money!

When is a debt charged off?  Federal Reserve regulations require that credit cards be charged off when they are 180 days late.  Car loans and installment loans charge off when they are 120 days late.  (When they figure whether a bank will have enough money next month, they are allowed to hope that your next payment will be there, if you are only 90 days late.  They do not expect you’ll start paying again if you are 180 days late.)

What happens after a charge off?  Sometimes they send it to a lawyer to sue you.  (In Virginia, if it’s less than $15,000, you get sued on a warrant-in-debt.)

Sometimes it goes to a debt collector.  A debt collector will send you a letter, and call you day and night to make a payment.  They will also show up on your credit report as a “collection account.”

A collection, like a charge off or bankruptcy, is a major derogatory that is very bad for your credit.  It’s worse than a bankruptcy, because it keeps piling on.  That charge off, from your original creditor–like Bank of America–has now been joined by a “collection account.”  Your same debt now shows up as two major derogatories–first the charge off, then the collection account.  Later on, if they sue you, then you get a judgment.  That would be your third major derogatory on the same debt.

Besides all this damage to your credit report, you still owe the money.  There’s a whole industry–debt collectors, debt buyers, collection lawyers, who make their living collecting charged off debts.

Credit bureaus are part of the debt collection industry in two ways.  First, although they like to deny it, credit bureaus are used by creditors to pressure you to pay.  Creditors set up credit bureaus as a way to pressure people to pay.

Second, the credit bureaus  alert the collection agencies when charged off debts have a chance of being paid.  Debt collectors can subscribe to email alerts, so they are notified when they have a good chance to collect charged off debt.

How does that work?  Suppose Chuck has been out of work for over a year, and five credit cards have bee charged off and gone to collection. After he told them each ten times that he was out of work and could not pay, Chuck was lucky and they left him alone.

Now Chuck is working again.  He looks at his credit report and decides to try to settle up on his charge offs, one at a time, starting with the smallest.

Boom!  As soon as he settles the smallest one, the phone starts ringing off the hook, with calls about the other four–each trying to be meaner than the other.

When that first settlement hit his credit report, the bureaus sent an email to all Chuck’s creditors, telling them to come and get it.  Pay off one creditor and they all jump on.

How does it all add up?  If you have a charge off, that’s a major derogatory on your credit report.  There’s a whole industry that tries to collect charged off debt.  Each step can put another major derogatory on your credit report.  Charge off does not protect you from any of that.

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