The Importance of Filing Tax Returns

Failing to file a tax return can prevent the consumer from being able to discharge the debt if they ever seek bankruptcy relief.  As a general rule, taxes that are due 3 years or less from the date the bankruptcy petition is filed are not dischargeable and will still be owed once the individual receives the discharge.  But the return has to have been filed at least 2 years before the bankruptcy case is filed.  The return can even be filed late as long as the 2 years have passed.  And that’s a good reason to file tax returns as soon as possible.  If it’s ever necessary to file bankruptcy, it will be very helpful if those returns were filed at least 2 years ago.

However, if an individual doesn’t file a tax return when it is due and the IRS sees income on a W-2 or 1099, the IRS can estimate the amount of tax they think is owed by preparing a Substitute For Return.  Once the IRS estimates the tax they think you owe on their Substitute For Return, they will send a deficiency notice.

The consumer can then file the real return and will probably owe considerably less than estimated.  But, for bankruptcy purposes, the IRS Substitute For Return does not qualify as a return for that 2-year rule.  Even worse, some bankruptcy courts have held that any return filed by a taxpayer after the IRS has prepared a Substitute For Return does not qualify as a return for bankruptcy purposes.  That means that once the IRS prepares a Substitute For Return for a specific year, it will never be discharged in bankruptcy court. For these reasons ,it is important to  file tax returns even if the consumer owes and cannot pay it.

 

Stopping Foreclosure by Filing Bankruptcy

If a consumer falls behind on their mortgage payments, and the lender accelerates the loan and initiates foreclosure proceedings, a Chapter 13 bankruptcy (wage earner) is often the only realistic way to save the home from a foreclosure sale.

Unless the homeowner can pay all unpaid mortgage payments, late fees, legal fees and foreclosure costs prior to the foreclosure sale, the lender will often proceed with foreclosures while offering loan modification options under HAMP or other programs, which may or may not stop the foreclosure. Many consumers rely exclusively on loan modification programs until it is too late and they are facing a foreclosure sale.

One thing that is very important to remember is that unless the lender agrees to stop the foreclosure by entering into a loan modification, the law firm conducting the foreclosure will be proceeding. This causes a great deal of confusion. It is a good idea to know about Chapter 13 bankruptcy, which can be a viable alternative for many people, even if they wish to attempt a loan modification.

Chapter 13 bankruptcy is the only way to immediately stop a foreclosure process and require the mortgage holder to accept payments on the arrearages over a period of time. In addition to saving a consumer’s home, Chapter 13 provides other benefits of discharging unsecured debts (like medical bills or credit cards), resolving tax problems, and reducing the monthly payments owed on secured debt such as car notes and furniture notes.

Post-Bankruptcy Filing Financial Management Course – What to Expect

After filing a bankruptcy case, the law requires the debtors to take a financial management course, which is done either online, by telephone or in a classroom.  If a debtor does not take this course, the bankruptcy court will close the case without a discharge.  Since the discharge is the motivation for filing a bankruptcy case, it is essential that this course be taken. 

In order to better explain to my clients what to expect, I took this course from a provider called StandSure.  They charged $15.00 for the course, which seems about average for other course providers in this area.  I found the course to be informative. 

The course begins by asking questions about what people already know about finances, such as what a budget is, or about money management.  After that, the course explains that the financial management course requirement and the budget management, the importance of setting goals, how to set goals, the difference between short term, medium term and long-term goals. The course explains the percentage of an individual’s income that should be devoted to each item in their budget. For example, mortgage or rent should be no more than thirty percent of the household income. Then the course provider discusses money management (thinking about what you want as opposed to what you need; the importance of comparison shopping; budgeting your money by tracking your spending, then reviewing your spending, and then creating a budget by taking into account your income; fixed and varied expenses, and learning to balance your checkbook; the importance of avoiding payday loans and title loans; information about insurance and the importance of saving money.  The course provider then goes on to explain all about credit listing the different types of credit; secured and unsecured credit.  The course provider discusses the importance of comparing credit offers and then explains the concept of predatory lending.  Credit discussions then explains FICO and credit scores, as well as the impact of bankruptcy on an individual’s credit report.

The course provider listed several websites that provided free financial information to consumers and then provides a nice summary of consumer protection laws.  Finally, the course gives a thorough summary of the changes of the bankruptcy law since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  At the end of course, you receive a Certification of Completion.  I found the course to be very informative and I thought it was a lot more interesting and a lot more useful than the prebankruptcy credit counseling course.

I recently read Dave Ramsey’s book regarding financial management after bankruptcy. I and several lawyers in the West Tennessee area agree that it was rather condescending. This makes me reluctant to recommend that particular course.