Monthly Archives: March 2015

When is good credit not so good?

Riddle me this: When is good credit not so good? Answer: When the credit card holder keeps himself poor and enslaved to his enormous, high interest rate credit card debt by having to make ungodly minimum credit card payments just to maintain a good credit score.

I consult with so many debtors who owe more than $50,000.00 in credit card debt, and who are paying anywhere from $1,000.00 to $1,500.00 per month (or more) in minimum credit card payments for years and years, while barely making a dent in reducing their overall credit card debt because all of their payments are gobbled up to pay the interest on the debt. Yet, despite the crushing burden of their credit card debt, their first concern generally has to do with saving their credit worthiness. It shouldn’t be.

The first thing to keep in mind is that it is easy to reestablish one’s credit. Some credit card companies are eager to extend new credit to debtors who have just emerged from bankruptcy with a discharge because they can’t refile another Chapter 7 bankruptcy for 8 years.
There are other ways to reestablish one’s credit. One easy way to reestablish credit is to get a “secured” credit card. With a secured credit card, the debtor deposits a sum of money with the credit card company – say $500 to $1,000, or more – and then the credit card company opens a credit card account with a “credit” line equal to the amount of the deposit. There is no risk to the credit card issuer, because the card holder is borrowing against his own money; however, a secured card allows the cardholder to show the credit card company that he can manage his account responsibly, while having access to credit. In time, if the secured credit card holder demonstrates to the satisfaction of the credit card company that he (the borrower) can responsibly manage his credit card account (i.e., by paying his credit card statements on time), the credit card company will refund the deposit, and the account will become a true, unsecured line of credit. At that point, the debtor has reestablished his credit worthiness.
Also, people with mortgages and car payments already have existing credit. By timely making their mortgage and car payments, these debtors both maintain and reestablish their good credit.
Buying a new (or used) car on credit is another good way to reestablish one’s credit worthiness. Auto finance companies tend to be very willing to lend money to debtors with adequate income after they have obtained a discharge if there is no prior history of auto repossession.
On the flip side, however, there is a typical debtor. The typical debtor is 35 or older, and has virtually no retirement savings. The reason the typical debtor has no retirement savings is because all of his disposable income is going to make his high minimum credit card payments. Such a debtor must take bold and decisive action to change his financial future, if he wants to avoid retiring in poverty, with only social security to support him. The situation is even more dire for those debtors in their 40′s and 50′s because it takes 20 to 30 years (or more) to really amass significant wealth; people in their 40′s and 50′s already have lost many critical years of wealth accumulation.
Often, the best course of action for people with significant credit card debt is to file for Chapter 7 in order to a) wipe out all of their credit card debt, and b) start over financially. One can be in and out of Chapter 7, with a discharge, in about 6 months or less. Most people keep all of their assets. Imagine. No more law suits; no more harassing collection calls. No more debt. Financial Freedom!
There is very little downside to filing for Chapter 7 if, at the end of the day, the debtor a) discharges all of his credit card and other unsecured debt, and b) can start saving for retirement using some or all of his disposable income that was being used for unproductive credit card payments. Everyone needs a fresh start in life; Chapter 7 can be that fresh start.
For those people who don’t qualify for Chapter 7, there are other bankruptcy options. However, the important first step is to stop the financial bleeding; sometimes, filing bankruptcy is the first step to accumulating wealth for one’s senior years. They will be here before you know it.

Income Taxes Can Be Discharged

Income taxes can be discharged in bankruptcy if the tax meets the following criteria:

1) The tax is at least 3 or more years old, measured from the time the tax is due;

2) The tax return for the year in question must have been filed at least two years prior to the filing of the bankruptcy;

3) The taxing authority has three years in which to assess a tax liability; once assessed, the taxing authority has 240 days in which to collect the assessed tax, during which time the tax retains its collection priority (i.e., it must be paid);

4) The tax must be the type of tax that is dischargeable [i.e., income taxes, excise taxes, which (in California) include sales tax, and the employer’s portion of payroll taxes]; and

5) There can be no tax evasion (i.e., the willful attempt to evade paying taxes, such as by failing to report all income, or by reducing taxable income by falsifying expenses or tax deductions).

Obtaining one’s tax transcripts helps in determining whether or not the tax year in question is dischargeable. In Chapter 13 cases, tax penalties are dischargeable, even when the underlying income tax is not old enough to be dischargeable; also, in Chapter 13 cases, interest (generally) stops accruing on pre-petition tax claims once the bankruptcy is filed. In Chapter 7 cases, the tax penalty is dischargeable only if the underlying tax is dischargeable, and interest continues to accrue on any tax liability that still retains its priority.

Chapter 13 is a great way to deal with delinquent tax debts – especially if (as is typically the case) the tax payer has other substantial debts (including, but not limited to, credit cards, personal loans, medical bills, or an auto repossession). A Chapter 13 bankruptcy will allow the debtor to pay those non-dischargeable taxes which have to be paid, while simultaneously discharging all dischargeable unsecured debts – including dischargeable taxes.

A bankruptcy generally will discharge any debt resulting from debt forgiveness, because insolvency is a defense to tax liability based on debt forgiveness, and bankruptcy is evidence of insolvency.

The “right kind” of payroll taxes can be dischargeable.

Federal payroll taxes are of two kinds: Form 941 payroll withholding taxes and Form 940 employer payroll contribution taxes. The 940 tax, known by the acronym “FUTA,” consists entirely of employer contributions. No portion of this type of tax is withheld from the employee’s wages.

For this reason, FUTA taxes are dischargeable to the extent that said taxes meet the standard requirements for discharging taxes in bankruptcy [In re Zecco, 211 B.R. 109 (Bkrtcy. D. Mass. 1997)], to wit: a) the tax must be more than three years old, b) the tax return must be filed more than two years before the bankruptcy, c) there has been no attempt to evade the tax, and d) the tax is not subject to a tax lien (i.e., the tax liability has not become a secured obligation).

Even if the payroll tax is subject to a lien, most IRS liens are subject to being attacked. Any lien – including any tax lien – can be avoided entirely to the extent that the lien does not attach to property, or it may be crammed down (i.e., reduced in value) to the extent that the IRS lien exceeds the value of the property to which it purportedly has attached. Since most tax liens do exceed the value of the property to which they attach, most tax liens end up being partially unsecured, and subject to being successfully attacked by an bankruptcy attorney skilled at attacking and cramming down liens.

941 taxes, commonly known as FICA, are primarily – but not exclusively – trust fund payroll taxes. That portion of 941 payroll taxes which are the employee’s contribution – and which are withheld from the employee’s pay check and transmitted by the employer to the IRS – are trust fund taxes. They are always non-dischargeable. Not only does the failure by the employer to transmit such trust fund payroll taxes create a non-dischargeable employer tax liability, but such corporate tax liability can be assessed against the corporate officer/director who was responsible for transmitting the payroll tax to the IRS, but who failed to transmit it.

However, 941 taxes also include some employer contributions. Typically, about two-thirds of the 941 taxes are employee trust fund payroll taxes and about one-third of the 941 taxes represent employer contributions. The employer’s 941 payroll tax contribution is not a trust fund tax; hence, the employer’s 941 payroll tax contribution is dischargeable, if it meets the general requirements for discharging taxes.

To the extent that the payroll tax is not dischargeable in bankruptcy, it may be possible to negotiate a reduction of the tax liability through an Offer in Compromise.