Can I get rid of my tax debt in bankruptcy?

The answer is, it depends.  It depends upon what kind of taxes you are attempting to discharge in bankruptcy but if you mean income taxes then yes you can discharge them in bankruptcy.  Income tax dischargeability in bankruptcy is determined to just a few rules.

3 year rule

Taxes are dichargeable 3 years after they were due if there were no extensions..  If the taxes were due for the 2008 tax year in April of 2009 they would be dischargeable 3 years later after April 15th of 2012.  If you received an extension until October 2008 then they would be dischargeable in October 2012.

2 year rule

Taxes are dischargeable two years after the return was actually filed.  So 2008 taxes filed in April of 2009 would be dischargeable in April of 2011.

240 day rule

If you had income taxes assessed by the IRS the 240 day rule applies.  These taxes are dischargeable 240 days or 8 months after they were first assessed by the IRS.  Assessments often come after an audit of your taxes or if the IRS denies one of your deductions and then assesses you a greater tax.  If you wait until 8 months after these taxes are first assessed then they are also dischargeable in bankruptcy.

Other taxes

Most people have state or federal types of taxe issues but there are other cases.  If you owe sales taxes,  payroll taxes or withholding tax for employees for instance then those taxes are not dischargeable.  The IRS (or California State Franchise Board in California) consider these non-dischargeable because they were supposed to be withheld by the employer.  Many businesses rn into this kind of tax and it cannot be discharged in bankruptcy unfortunately.

Tax Fraud

If your tax return was made fraudulently or made to willfully evade taxes then those taxes would be deemed non-dischargeable in bankruptcy according to section 523 of the bankruptcy code.  This code section covers all of the exceptions to discharge.

Tax liens

If a tax lien was filed against you for failure to pay the tax then that lien does not get wiped out in the bankruptcy.  It remains after the bankruptcy.  So for example if the IRS put a tax lien on your house then it would not be extinguished by your chapter 7 bankruptcy.

You also need to be sure also that what you owe to the government is a tax.  If it is considered a “fine, fee, or penalty or forfeiture payable to and for the benefit of a governmental unit” then it is not dischargeable.  This is from section 523(a)(6) and this section is referring to things  like traffic tickets, parking tickets, court imposed penalties and fees.  Just make sure your tax is a tax and not one of these fines or penalties.

So most of your income taxes are dischargeable if they are old enough.  Have your attorney look at them careful to make sure they are.  You can always wait to file until they age if need be.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Private student loan debt is unfortunately not dischargeable in bankruptcy, but it should be!

There is a problem in this country with student loan debt.  I have blogged about student loans here and here and how student loan debt is increasing every year.  Many believe that it is going to be the origin of the next financial crisis or at least the factor that prevents any economic recovery to occur.  Outstanding student loan debt has topped $1 trillion and is still rising every year.  It is clear that this debt will have profound effects on the economy if it is not dealt with.

But student loan debts comes in two types.  The “old” type of student loan debt is government backed student loans.  These are loans backed by the U.S. government (ie taxpayer).  These are loans that government agencies back or give out and these loans have been historically non-dischargeable in bankruptcy as is the case with most debts owed to the government.

But along came BACPA in the year 2005 which created a sweeping reform of the bankruptcy laws and gave us things like the “means test”.  In that 2005 law private student loans were added to the list on non-dischargeable debts.

Years ago, before 2005, I  remember advising people that we could discharge their debts for truck driving schools, hair and nail academies, and other school debts if the the money lent came from a strictly private institution with no government backing or funding.  These loans were far fewer then but could be discharged in bankruptcy.  The lenders of these loans knew of their non-dischargeability and the lenders were therefore careful to whom they lent the money.

Section 523(a)(8)(B) of the new bankruptcy law changed things. Private loans now fell into the category of “any other educational loan that is a qualified education loan” and they were rendered non-dischargeable. Many of us believe that this in turn led to an explosion of these student loans.

With these loans being safe from dischargeability in bankruptcy the lenders went out to push these loans.  They were now after all a good risk.  Debtors would be stuck with them for life and the creditors would get paid back.  According to the PBS special “College Inc.” the schools now got into the act.  They hired recruiters to find masses of students who would sign up for these private degrees.  These masses of students would then attend these private colleges funded by these private loans that were now freely available.

The biggest of these was the University of Phoenix.  I was talked to by a recruiter way back in the 1980s from that “University” so they have been active for some time.  They seemed to have grown substantially more recently though probably due to the availability of this private money.  They and the others then pumped out these degrees to students by the thousands.  Each student then was shackled with a large (non-dischargeable) student loan debt when he or she gets the degree.  This would seem to be such a problem if these students could get a job.

In fact though many of these degrees are worthless.  PBS talks about a nursing school that gave degrees to people who never stepped foot inside a hospital.  Another student took on $200,000 in student loan debt for a doctoral degree from a school without the proper accreditation.  Many of these students never get a job from these degrees that they borrowed massive amounts to fund and many never will because the degrees are worthless and employers know it and don’t hire graduates from these “Universities”.

This new for-profit system of education is a big change in the way have historically educate.  Colleges were in the past non-profit private schools or government schools which were of course non-profit.  These new schools claim they want to change all of that and provide an alternative way of providing education.  But that education or those degrees provided by these institutions must be worth something in that they put heir graduates in line for some occupation.

n the past those for profit schools were smaller and had less students.  I believe it was the 2005 bankruptcy law that in part led to an explosion of these school as it led to an explosion in the money available to finance these schools.  In the 1980s you probably could not get a loan to go to the University of Phoenix.  No private lenders would lend for this as they knew you would bankrupt it away when you got out and could not get a job.

Burt when the law changed and the debts would last forever the became a good risk for lenders and they pushed the money out.  The schools picked up on this and they advertised this money availability and probably stretched the truth a lot about the employment rates of their graduates.  This has led to the $1 trillion student loan debt situation we have today.

There is a law that is attempting to address this but I will save you the trouble of looking it up or hoping it will pass.  I believe if we just go back to making these private debts dischargeable in bankruptcy the money available to fund these schools would tighten up considerably.  The numbers of students would then shrink drastically and so would the graduates. This would certainly help their employ-ability as their would be less of them and if students couldn’t get a job from one of these degrees then bankruptcy would remain an option.  Bankruptcy is usually better than paying for student loans forever when you can’t get a job.

I am a bankruptcy attorney practicing bankruptcy law in San Diego.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis! 

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

What debts are not dischargeable in bankruptcy?

The most common types of non-dischargeable debts are student loans, government fines and fees and some taxes, spousal and child support.  There are other categories such as debts incurred due to fraud but these are much less common.

Student loans– These debts are almost always not dischargeable.  Whether they are government backed student loans or loans from a private agency they are not dischargeable.  The 2005 BAPCA law saw to that.  Loans issued “for any educational purpose” are now all non-dischargeable in bankruptcy and student loans will pass through the bankruptcy unaffected and you will have to pay them.

There is a hardship discharge for student loans in bankruptcy but it is very hard to get.  To get a hardship discharge of student loans your attorney would have to bring an adversary proceeding in bankruptcy court.  This amounts to a mini-trial where all the facts of the hardship would have to be proven.

It is expensive and time-consuming to bring such a s case and there is no assurance that you will win.  In fact it is apparently very hard to win one of these trials at all.  There are stories of judges looking at a disabled debtor and telling them that they though they cannot work any more in their field, they could teach and earn money to pay the student loan back that way.

Government fines, fees, penalties, and some taxes– If you get a traffic fine or criminal fine levied by a court or other government agency then those fines are not dischargeable in bankruptcy.  That is easy but taxes are more difficult.  The main rule for taxes is the 3 year rule that states that 3-year-old income taxes are dischargeable in bankruptcy.

So in 2012 (after April 15th)  income taxes for 2008 would be dischargeable.  This is because these taxes were due in april of 2009.  Both state and federal  income taxes are dischargeable in bankruptcy if the meet this 3 year rule.  There are other rules too but this is the main one that applies to most people.

Other types of taxes are not dischargeable so consult with an attorney for advice on your tax situation.

Spousal and child support– Forget about discharging these.  You will have to pay your ex-spouse or your children after you get a support obligation levied against you.

Fraud– Debts where fraud is proven will not be dischargeable.  If you get sued and the plaintiff alleges fraud then you want to fight these cases because bankruptcy will not save you from having to pay.  The normal credit card suit usually will not contain a fraud allegation but credit card companies can allege fraud in a bankruptcy.  This usually occurs if you have very large recent charges on your cards for cash advances or luxury items.

If you have such charges then tell your attorney so he can wait some time to file or advise you on the possible consequences if you do file right away.

The good news is that if your debt does not fall into one of the non-dischargeable categories then it is probably dischargeable in a bankruptcy!

For more info. check out my websites at:   www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office to speak toe for free about any bankruptcy or debt related issue  at (619) 702-5015.  Call now for free credit report and analysis!  I am a San Diego bankruptcy lawyer.  For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.