Correcting Erroneous Credit Reports

People reviewing their credit reports sometimes find errors including the listing of a delinquent debt, which in fact is no longer owed. As a bankruptcy lawyer , I sometimes have clients returning to me long after their discharge asking, why debts that were discharged by the bankruptcy are still showing up on their credit reports. The simple answer is that credit reporting agencies make mistakes, lots of them, which of course leads to the question of what one can do to correct the errors.

By law when an individual challenges an item on a credit report the credit reporting agency is required to investigate and correct any errors within 30 days. Since credit reporting agencies are big bureaucracies that are not particularly user friendly, you have a better chance of success writing them a letter than calling on the phone. Many advisers would tell you that the letter should be sent certified. You should include with the letters copies of all documents that support your position. In the case of a bankruptcy I would include a copy of the notice of filing from the court and a copy of your discharge. It is also a good idea to include the pages from the credit report with the erroneous information circled. You should also write to the company that supplied the erroneous information to the credit reporting agency with the same documentation telling them to correct the mistake as well.

The results of this process are not always satisfactory. Sometimes after supposedly doing an investigation the credit reporting agency will conclude that it is no error. This is of course frustrating and while you can theoretically bring a law suit for damages in this situation, not many people want to go through that ordeal. Nevertheless the official procedure does correct the problem in many cases and should be used.

New Debts Incurred While In a Chapter 13 Bankruptcy

While the idea of a Chapter 13 Bankruptcy is for debtors to devote all of their available income to paying off what they owe, and not to incur any new debts, this is not always how it works. An unexpected health problem may lead to new medical debts, or the person’s car might completely give out, and she might need a new vehicle to continue going to work. Even if there is no such clearly justifiable reason for incurring the new liability, it can take strong self discipline to convert from living beyond your means, to pulling in your belt enough to eliminate past excesses. Thus sometimes even the best intentioned debtor can slip up and accept a newly offered credit card that arrives in his mail box one fine spring day.

One option a debtor in a Chapter 13 has in this situation is to amend his bankruptcy plan to include the post petition debt. This is not an automatic right though. For most new debts the individual has to persuade both the court and the new creditor to go along with the idea. The court of course has to approve any amendments to a Chapter 13 bankruptcy plan, and the creditor has to agree to file a proof of claim with the bankruptcy court.

The creditor might well be uninterested in filing a proof of claim, because in most Chapter 13 bankruptcies he will end up receiving less than 100% of what he is owed. On the other hand, if the creditor refuses to file the proof of claim he can go after the debtor for the full amount due after the discharge. The key phrase here though is “after the discharge.” While the Chapter 13 plan is in affect the automatic stay forbids the post petition creditor from taking any action to collect the debt. On the theory that a bird in the hand is worth two in the bush, the new creditor may thus find himself with a genuine incentive to enter the Chapter 13 plan and start getting payments now.

Transfer of Property Before Filing Bankruptcy

When an individual files a Chapter 7 bankruptcy , the court may take away any of his property that is not exempt under the law and use it to pay his creditors. Exemptions from creditors under Illinois law include among other assets, $15,000.00 of equity in one’s home, $2,400.00 of equity in a car, and up to $4,000.00 of any personal property.

Debtors sometimes believe that the way to avoid losing property that is not exempt is to give it away to a friend or relative prior to filing bankruptcy. However, the law labels this type of transaction a “fraudulent transfer” and the bankruptcy code provides ways for the trustee is avoid these fraudulent transfers and recover the property from the person who received the gift.

Since in most cases the debtor would have still lost the property in bankruptcy, if he had not made the transfer in advance, it might seem that he has nothing to lose by trying. However, this is not always true. A number of courts have held that the trustee can recover property transferred right before bankruptcy by an insolvent debtor, even if it would have been exempt in the bankruptcy. In other words the debtor can lose his exemption in a house or a car by attempting to pull off what he considers a clever scheme, when in fact his shenanigans were not even necessary in the first place.

Bankruptcy Exemptions For Spousal Pensions

Retirement plans such as pensions, IRAs and 401ks are designed to provide a worker security in his old age, and they can frequently provide additional benefits to his heirs or spouse. On top of the tax benefits created by the Internal Revenue Code for these plans the worker can also exempt these funds from any creditor claims in a bankruptcy. This double benefit leads me as a bankruptcy lawyer to think they are frequently the best investment an individual can make. Recent court cases however have placed some limitations on creditor protections, when someone other than the worker himself holds the retirement plan.

One such decision that came down in 2014 was In Re Burgeson 504 B.R. 800 (Bankr. W.D. Pa. 2014). This case concerned the pension benefits received by the wife in a divorce. In Burgeson the Debtor filed bankruptcy, while she was in the process of a divorce. She had requested that the divorce court award her an equitable portion of her husband’s pension plan, but the court did not order the transfer of the pension until later. The trustee claimed that in this case the woman’s interest in the pension was not exempt from creditor claims and the bankruptcy court agreed. While the wife would have received the exemption, if she had owned the pension, the judge made the distinction that at the time she filed bankruptcy she did not yet own the pension. This was because she had only asked for a share of the pension and the divorce court had not yet awarded it to her. So according to the bankruptcy judge at the time she filed, she only owned a potential claim against her husband under the divorce law, which was not covered by the exemption against creditor claims that appears in the bankruptcy law.

Divorce Debts In Chapter 13 Bankruptcies

Since public policy does not favor a person abandoning one’s dependents to the wolves, courts have been holding for over a century that child support and alimony are not dischargeable debts in bankruptcy. And since 2005 the law has been that virtually all other payments, such as property settlements, owed to one’s spouse under a divorce judgment are not dischargeable either. In some cases however the bankruptcy treatment is still stricter for child support or alimony than it will be for property settlements. This occurs for example in a Chapter 13 bankruptcy , in which an individual makes monthly payments over a three or a five year period to repay part of his debts. The different treatment arises, because child support and alimony are priority debts, and people in a Chapter 13 bankruptcy must repay 100% of their priority debts to receive their discharge. Property settlements however are not priority debts, and the Chapter 13 debtor only needs to pay back the same percentage, as he pays to his other unsecured creditors. The amount paid to general unsecured debtors in Chapter 13 is based on the ability to pay and frequently is only 10% of the debt.

With this variation in results disputes sometimes arise over whether a certain marital debt is child support or alimony rather than a property settlement. In these controversies the bankruptcy court makes this decision, and what the debt is called in the divorce judgment is not binding under the bankruptcy law. Factors considered include whether the party receiving the payments needs support and whether they are made on an installment basis. Unfortunately as the old saying goes “Hard cases make bad law,” and since a failure to support children can lead to some tragic situations, courts have not been totally consistent in these cases. Some judges for example have ruled that a judgement ordering someone to pay his former spouse’s car payments or mortgage payments create priority support debts, but other court cases have reached the opposite conclusion. This of course sometimes makes it difficult to predict in advance whether a court will rule that a debt is support rather than a property settlement.

Education IRAs

In today’s society the cost of sending one’s children to college can wreak havoc in a family budget. Besides using student loans many parents end up taking out second mortgages or liquidating retirement savings to meet these expenses, and the financial strain involved has certainly helped drive more than one family into Chapter 7 Bankruptcy. In order to bring some relief of this burden the Internal Revenue Code contains certain tax benefits for taxpayers with educational expense. Although these incentives are not nearly as generous as tax benefits for homeowners or oil drillers they do provide some assistance. One such form of assistance is the Education IRA.

Education IRAs, officially known as Coverdell Education Savings Accounts, allow a tax benefit for saving for educational expenses. While most people think of college, when saving for education expenses, Education IRAs can also be used for vocational schools, high schools, or even elementary schools. Unlike with some tax benefits for higher education, distributions from Education IRAs can be applied for tuition of part time students. In order for distributions to be used for room and board though, the student must be attending the educational institution at least half time.

An Education IRA is a trust fund which must be set up when the beneficiary is either under age 18 or a special needs individual. Up to $2,000.00 a year can be contributed to an education IRA. The allowable contribution is phased out for high income individuals. While the contributions are not tax deductible the income that accumulates in the trust may be distributed tax free, when it is used to pay qualified expenses. Distributions of income made for non qualifying expenses are subject to regular income tax plus a 10% penalty.

Limitation on Charitable Contributions

When an individual makes a contribution to charity his tax deduction is limited to 50% of his adjusted gross income. The percentage could go down depending on the type of property contributed and the type of charity that receives the donation. Charities that have a 30% limitation include fraternal orders, war veteran organizations, cemetery companies, and certain private non-operating foundations. The deduction is also limited to 30% of adjusted gross income, when an individual contributes property that would have produced long term capital gains to a qualifying 50% charity. However, the donor can save the 50% limitation by electing to only take the amount of the basis in his property as a charitable deduction on his tax return.

In applying these rules to contributions of appreciated assets, you should keep in mind that there are also rules reducing the amount of the charitable contribution on certain specific capital gain property. This category includes tangible personal property that is unrelated to the charitable organization’s exempt function, and capital gains property other than publicly traded stock donated to certain private foundations. For these assets taxpayers are required to reduce the amount of a charitable contribution by the amount of the long term capital gains that the sale of the property would have generated.

Example: A bankruptcy lawyer donates her jewelry to her alma mater, which the college sells to help pay faculty salaries. Since the jewelry was not used in providing education, her tax deduction for the jewelry will be reduced by the capital gain she would have received, if she had instead sold the property and donated the proceeds to the school.

Additional Medicare Taxes For High Income Earners

Beginning with the year 2013 an additional medicare tax of .9% apples to the salaries of high earners. The tax applies to annual wages over $200,000.00 for individuals; $250,000.00 for joint returns and $125,000.00 for married individuals filing separate returns. The law imposes this tax on the employee not the employer. An employer is required to withhold the additional tax for employees that he pays more than $200,000.00 a year, but this withholding obligation will not cover many situations, where the employee has tax liability.

Example: Judy works as a plastic surgeon for a local hospital and in 2014 earns $175,000.00 a year. Her husband Jim works as an estate planning lawyer for a large law firm for a salary in 2014 of $150,000.00 a year. Since neither one of them earns more than $200,000.00 a year their employers will not withhold the additional .9% medicare tax. However, since their combined salaries exceed the thresh hold by $75,000.00 they will owe an additional medicare tax of $675.00 which they will have to submit, when they file their annual 1040 tax return.

Self employed individuals are also liable for the .9 % additional medicare tax on their earned income which exceeds the limits.

Tax Deduction For Domestic Production Activities

One of the tax breaks that Congress has enacted to encourage manufacturing and other production in the United States is the deduction for domestic production activities. Under this law a taxpayer can take an extra income tax deduction equal to 9% of its domestic production income.

A taxpayer calculates his domestic production income by taking gross receipts from qualified activities and subtracting costs of goods sold and direct and indirect expenses allocated to the qualified activities. Qualified activities include lease, rental sale or license of property manufactured, produced grown or extracted in the United States. It covers qualified film production and production of electricity natural gas or potable water. It also covers construction of real property or architectural or engineering services connected with the construction of real property. Most service businesses, such as a bankruptcy lawyer, would not be eligible to claim the deduction.

Since part of the purpose of encouraging domestic production is also to encourage domestic employment the deduction for domestic activities production is also limited to 50% of W-2 wages paid by the taxpayer. Thus the deduction is the smaller of 9% of domestic production income or 50% of W-2 wages.

Listed Property For Income Taxes

The Internal Revenue Code classifies certain depreciable property as “listed property.” Listed property consists of items that Congress felt required special rules, because they are the type of property that could generate legitimate business expenses, but which is frequently really used more for personal than business reasons. The term includes passenger automobiles; other forms of transportation likely to be put to personal use such as boats or airplanes; entertainment recreational and amusement property; and computers and peripheral equipment.

The first restriction on listed property is that the taxpayer can only claim accelerated depreciation on the equipment, if it is used more than 50% for business. Thus if a bankruptcy lawyer puts 10% of the mileage on her car driving to court, but the rest of her use of the vehicle is personal, she cannot use the accelerated rate of depreciation that is normally available on automobiles. Instead she can only use the straight line method of depreciation for the 10% of the car she is allowed to depreciate, and she must use a longer depreciable life.

The other restriction on listed property consists of stricter record keeping requirements in order to qualify for the tax deductions. On listed property taxpayers are required to record when and where the property was used for business and the business purpose involved in each use.

Premium Health Insurance Tax Credit

As any bankruptcy attorney can tell you health problems can lead to financial disaster, and one of the reasons for this has been that many Americans could not obtain the adequate health insurance. A major goal of Obamacare is to increase the number of people with health insurance, and beginning with the 2014 tax year certain individuals with a limited income can obtain a tax credit to help with the payment of their health insurance premiums.

To obtain the credit these individuals must buy health insurance through the Marketplace, be ineligible for insurance through an employer or government plan, file a joint tax return if married, and not be claimed as a dependent on another person’s tax return.

To meet the income eligibility for the program your household income must be between 100% and 400% of the federal poverty line. The federal poverty line is based on family size and is adjusted each year. For 2013 the poverty amount for the 48 contiguous states and the District of Columbia was $11,490.00, which would leave an individual with annual income up to $45,960.00 eligible for the credit. For a family of four the poverty level was $23,550.00 leaving a family of four with income up to $94,200.00 eligible for the credit.

When To Enter A Premarital Agreement



The lead story in the Chicago Tribune Business Section this Sunday was about the divorce of the wealthiest man in Illinois, and the court fight over the validity of his premarital agreement. According to Mr. Griffin’s agreement his wife should end up with about fifty million dollars. after the divorce. Mrs. Griffin however is challenging the agreement and hoping to take away a much larger share of her husband’s five and a half billion dollar net worth.

While I am not to worried about either one of them ending up in the poor house if they lose the argument, their controversy illustrates a common area of concern with a premarital agreement. The contract was signed one day before their 2003 wedding, and when these agreements are entered into this close to the marriage date they are subject to challenge based on the inability to carefully consider what the parties are signing with this time pressure. I do know lawyers in fact, who for this reason will refuse to represent parties in a premarital agreement unless they are going to sign the agreement at least thirty days before exchanging vows.

One might be surprised that this could happen to a couple, who had very talented lawyers working on the agreement, and who presumably fully advised their clients on the consequences of their acts. However, there are two facts of human nature, that no doubt were involved. First of all no one wants to reschedule their wedding at the last minute, and a suggestion to do from your family lawyer is unlikely to be well received.. Second when negotiation is involved contracts frequently take longer to finalize than the parties anticipated.

In conclusion I should probably just say that like obtaining a reservation for your reception hall, writing your premarital agreement is something you should try to allow plenty of time for when one is planning to tie the knot.

Tax Deductions For Depreciated Apartment Buildings

As a bankruptcy attorney I have seen plenty of individuals, who have lost money on rental real estate investments in the last few years. This can prove quite a letdown after people buy a house or an apartment building with the hope of building a nest egg for their future. Fortunately though compared to people, who have lost money on their principal residences, the tax law is more generous with people who invest in rental property.

A building owned for rental purposes is covered by Section 1231 of the Internal Revenue Code. Section 1231 assets include most property which is held for more than one year and used in a trade or business or for the production of income. Such an asset receives special tax treatment when it is sold.

When a Section 1231 asset is sold, any gain is treated as capital gain, which means the tax rate on the gain will be considerably lower than the tax rate on ordinary income. For most property which is entitled to capital gains treatment there is a potential downside in that, if the property sells for a loss it will be treated as a capital loss, and capital losses create a number of hurdles for claiming the benefit on your tax return. For example you can only deduct a net capital loss of $3,000.00 or less against ordinary income on any year’s tax return.

When a Section 1231 asset is sold at a loss though the taxpayer may treat it as a loss deductible against ordinary income. This can produce a considerable break for someone, who has made an unlucky real estate investment in the last few years .

The Section may not produce as much of a benefit though for a large landowner who has bought and sold a number of rental properties. This is because, when you have net 1231 gains in any tax year, you will have to reduce the amount that can be treated as capital gain income by the amount of Section 1231 losses which you incurred in the prior five tax years.

Tax Deductions For Charitable Contributions Of Appreciated Property

Taxpayers can take a deduction for a contribution to a charity, and when the contributions are of property the deduction is generally equal to the fair market value of property. This has lead many people to believe there are advantages to contributing appreciated property to charities.

Example: If an estate planning lawyer bought stock for $1,000 five years ago that is now worth $10,000, it might be wise for her to donate the stock to her church rather than sell it. She could then claim a $10,000 deduction for contributions and avoid paying capital gains taxes on the $9,000 the stock has increased in value.

However, the charitable deduction in this case would be limited to 30% of the donor’s adjusted gross income for the year computed without regard to the charitable contribution or the net operating loss deductions. This is less than what she would be entitled to under the general rule, which allows charitable deductions to be up to 50% of this base amount.

The donor could also lose the deduction on the appreciated portion of capital gain property, if it is tangible personal property that is not used in the church’s exempt purpose, or if it is applicable tangible personal property that is sold rather than used in the organization’s exempt purpose. There is also a limitation for long term capital gains property contributed to certain nonoperating foundations. A special rule applies to qualified intellectual property which computes the charitable deduction based on the income the donor received from the intellectual property.

Tax Deductions For Alimony

When a divorce court orders one spouse to pay alimony to the other spouse it is taxable income to the person receiving the deductions. The person paying it however gets to take a tax deduction on the payment. Alimony is also a deduction from adjusted gross income, which means the husband or wife paying it receives the tax benefit, even if he or she does not itemize their tax deduction.

While this might seem a situation in which whatever one spouse gains the other spouse loses this frequently is not the case. As a bankruptcy attorney I can tell you that in most cases in which the court orders alimony it is because the party receiving the payment needs financial help and the party being ordered to pay it is significantly better off. Thus while the payer will get his deduction the receiver is likely to be in a lower tax bracket and will end up paying less tax than the former spouse saves.

To receive the alimony tax treatment the payment must meet the test set out in the Internal Revenue Code. The payment has to be made in cash or a cash equivalent, it must be the result of a divorce or a separation agreement, and the payments must not continue after the death of the payee. Also it cannot be child support, and there can be some recapture of the tax benefit, if the payment drops too much in the first three years.

Taxation of Installment Sales

When a taxpayer sells property in a contract that calls for payments to be made in more than one year, he or she generally reports the income on the installment basis. This means that he computes the taxable income for each year by multiplying the amount received that year by the percentage of the total sales price that will result in profit.

Example: A retiring bankruptcy attorney sells the painting on his office wall, which he paid $10,000 for to another lawyer for $20,000. The price will be paid over four years at $5,000 a year. Each year the seller will recognize $2,500 of taxable income.

The installment sale method applies only to gains and not to losses. It also requires that the seller recognize certain depreciation recapture and unrealized receivables in the year of sale, and only spread out the balance of the gain to future years.

There are a number of transactions for which the method cannot be used. Dealers in property may not use the installment method except for certain dealers in time shares or residential lots. Nor can relatives or controlled partnerships use it on certain sales of depreciable property. Stock or securities trades on an established security market may not be sold under the installment method, but closely held stocks, partnership interests or small businesses are eligible for the treatment.

Taxation of Income On Long Term Contracts

In our modern world businesses often enter contracts that take several years to complete, and the question arises on when a taxpayer should recognize the income from a long term contract. The general rule is that a taxpayer earning income on a contract for the manufacture, building installation, or construction of property that will not be completed in the tax year in which is starts must report income on each annual tax return using the percentage of completion method.

In the percentage of completion method the business first calculates the cost of the project for the tax year and then determines what percentage this amount is to the total costs that will be incurred on the contract. The second step is to apply this percentage to the total gross receipts that will be received under the contract, and by subtracting the years cost from this calculated percentage of gross receipts one determines the income or loss for the tax year. Exceptions to the requirement to use the percentage of completion method include home construction, other real property construction expected to be completed within two years by a taxpayer with less than $10,000,000 of annual gross receipts, and manufactured items that are not unique and normally take less than twelve months to complete.

Of course to apply the percentage of completion method one has to estimate the total costs and the total receipts one is going to incur during the entire contract term, and as any bankruptcy attorney can tell you contracts do not always finish within budget. The law however includes a look back rule, which requires the taxpayer to recompute at the completion of the project what the profit would have been each year, if they had known the actual total costs and receipts at the time, and pay or receive interest on the difference between the tax paid and what the tax should have been. There are exceptions to the look back rule for certain small contracts and for home and other real estate contracts that are not subject to the percentage of completion method.

Taxation of Partnership Distributions



When a partnership makes a distribution of money or properties to its partners it is generally tax free to both the partnership and the partners. A partnership is a pass thru entity for income taxes. When the entity makes income or loses money each partner reports their share of the gain or deducts their share of the loss on their individual tax returns. The income will thus have already been taxed and the distribution will not trigger additional liability. If a partner later sells the property subsequent to receiving it from the partnership, he or she will recognize taxable gain or loss on the sale.

One exception to this rule occurs when a partnership has unrealized receivables or substantially appreciated inventory. These assets have a built in gain that will generate taxable income and sometimes certain partners will want to receive a higher or lower portion of this property in order to manipulate their individual tax liability.

As an estate planning attorney I sometimes encounter partners who think of this scheme. A partner in a higher tax bracket for example may wish to take a higher percentage of assets that will generate long term capital gains when he ultimately sells them. Unfortunately I have to tell these individuals that the Internal Revenue Code has a provision to discourage this conduct. Unless unrealized receivables or substantially appreciated inventory are distributed to the partners proportionately to their partnership interest the law will treat this distribution as a sale, which can generate taxable income.

Income Tax on Capital Gains

When an individual sells property which is considered a capital asset at a profit after over a year of ownership, he or she will be paying a lower rate of taxes on that profit than on most other types of income. It gets complicated though, since the long term capital gains rate will vary depending on what your regular income tax rate is. Capital assets are also divided into several categories that will affect the rate.

For most assets the long term capital gains rate would be 20% ,if the individual would pay a 39.6 % rate on ordinary income, or 15% if the individual would pay at less than 39.6% on ordinary income but more than 25%. For those in less than a 25% tax bracket, which probably represents a majority of individuals, there is no tax on the long term capital gain. The long term capital gains tax rate however can go up to 25% on property that involves depreciation recapture and 28% on collectibles.

As an estate planning lawyer could also tell you an individual can escape all taxes on capital gains property, if he or she holds it for the rest or their life. Property held at death generally receives a step up in basis to the fair market value at the date of death, and the heir will only incur tax liability, if it further increases in value after that date.

Taxation of Vacation Home

As an estate planning attorney I encounter people from time to time, who have included a vacation home, among their investments. Since most of us have limited vacation time during the year the owners of these residences often rent them out, when they are not using them. The rental income is taxable income, but the treatment of the expenses as tax deductions becomes complicated, when there is both rental and personal use of the property.

Certain expenses such as mortgage interest and property taxes may be deducted on any second home; however, other expenses such as insurance and repairs are only available, if a building is used to produce income. If an owner uses a vacation home for even one day of personal use, he or she is required to allocate these other business expenses between the time the dwelling is used by the owner and the time it is used to produce rental income and no deduction is allowed for the personal use period.

If a vacation home is considered a residence the taxpayer is also limited by a rule that his total deductions cannot exceed his rental income. A vacation home is considered a residence, if the taxpayer puts it to personal use for the greater of 14 days during the year or 10% of the number of days the unit is rented for.

Disability Access Credit

As a bankruptcy lawyer I know that the cost of complying with government regulations can place a heavy burden on small businesses. Congress however has enacted certain tax breaks that sometimes will help to defray the cost of compliance. One such measure is the Disability Access Credit, which allows small businesses a credit for costs of complying with the Americans with Disabilities Act. The credit is 50% of the costs of modifying buildings, equipment, materials or services to make the business more accessible to disabled individuals.

The benefit is designed to apply only to small businesses. The credit is for qualified expenditures of between $250.00 and $10,250.00 which means the maximum credit is $5,000.00. An eligible taxpayer must have gross receipts of $1,000,000.00 or less a year or must employ less than 30 full time employees.

Chapter 11 Bankruptcy Claims

At some point in their lives many people will receive a notice, that some company they have done business with has filed a Chapter 11 bankruptcy. The bankruptcy court sends the notice, because the company supposedly owes the person some money, and after reading the notice an ordinary person seldom has a good idea of what they need to do to protect themselves. As a creditor the person has the right to hire a bankruptcy lawyer to participate in the court proceedings on their behalf, but this is rarely a practical approach except for very large debts.

What the individual should do is to file a proof of claim with the bankruptcy court stating the amount of money that is owed to him or her. The form is available on the bankruptcy court web site. This will allow you to participate in the payments distributed by the court to creditors.

In most cases filing a proof of claim is in fact probably not necessary, but it is a good precaution to take. In a Chapter 11 bankruptcy a scheduled debt will normally participate in the distribution without the necessity to file a proof of claim. Presumably the reason a person receives the notice of bankruptcy is because their debt has been listed among the creditors.

The amount scheduled by the bankrupt company however, might be less than is actually owed and the only way to contest its sufficiency is to file a proof of claim. Furthermore, while bankruptcy petitions are public records, and you can go on line to figure out if your debt was scheduled, trying to find your way through a complex bankruptcy petition is no easy task. Filing a proof of claim to make sure you are in there tends to be a more feasible approach to protecting your interests.

Refinancing a Mortgage After Bankruptcy

When an individual goes through a Chapter 7 bankruptcy the amount owed on a mortgage note on her residence is discharged. However, the security interest the mortgage creates remains in affect. This means that the mortgage company can not force a debtor to make any payments on a mortgage after a bankruptcy filing, however the creditor may foreclose on the property and take possession, if the debtor does not make the mortgage payments. In most cases, if the debtor wants to keep the house, she continues to make the payments, the mortgage company continues to accept the money and everything works out fine.

A problem sometimes arises though, with borrowers attempting to refinance the mortgage several years after the bankruptcy. Mortgage companies in this situation are reluctant to refinance a debt that is discharged, because it is illegal for them to take action to collect on a discharged debt. Thus they often deny the refinance application to a customer, who has never missed a payment, and who would otherwise be a good candidate for the program.

Unfortunately there is not necessarily an easy solution to this problem. The situation would be solved, if the debtor reaffirmed the mortgage debt; however, this can only be done before the bankruptcy discharge. At the time the bankruptcy is pending though her bankruptcy lawyer may advise against reaffirming the mortgage, because of the personal liability that might create, if a foreclosure does take place. The problem might be avoidable by going to another lender, since the new bank would not be a creditor on the discharged debt, and would not have to worry about violating the law here. As a practical matter though a new lender can be less likely to approve the refinancing than the original lender.

Can I Reaffirm A Car Loan in Bankruptcy

When an individual files a Chapter 7 bankruptcy the discharge applies to secured debts, however the lender can still enforce the security interest. Thus when someone fails to make car payments after going bankrupt, the lender can repossess the vehicle, but it can not come after the debtor for additional funds, when the price the repossessed vehicle sells for is less than the outstanding loan.

In a Chapter 7 bankruptcy the debtor sometimes wants to enter a reaffirmation agreement on a car loan, which makes the debt fully enforceable, just as if the debtor had never filed the bankruptcy.

There are advantages of signing a reaffirmation agreement. Some car lenders will require the debtor to sign the reaffirmation agreement as a condition of keeping the vehicle, and the law gives them this right. Most secured lenders though seem happy to accept the payments whether or not there is a reaffirmation agreement and in this case the borrower will still own the property once the loan is paid off.

Anther advantage of signing a reaffirmation agreement is that signing the allows the lender to resume sending monthly statements, which helps him keep track of when payments are due. Furthermore, if you pay off a secured debt that has been reaffirmed it will show positively on your credit report.

The big disadvantage of reaffirming a car loan is that, if the debtor fails to keep up the payment the lender can still collect a deficiency after the property is repossessed. For this reason a bankruptcy judge will not approve the reaffirmation agreement, if he does not believes the debtor can keep up the payments. If the schedules on the bankruptcy petition indicate that the debtor cannot afford the loan, the court will presume that signing a reaffirmation agreement creates an unreasonable hardship. The debtor can present fact to the court however, that the court might not have been aware of and ask the judge to reconsider. For example, I once used the fact that a client had quit smoking after filing bankruptcy, which freed up a couple hundred dollars a month in income to make the car payment.

Inheritances During A Chapter 13 Bankruptcy

If an individual inherits property after filing bankruptcy the inherited property can be subject to creditor claims, if the person leaving the property dies within 180 days after the bankruptcy filing. The death is the key date in this rule. Normally after death probate takes a number of months. and it would be sometime, before the debtor actually receives the property. However, as long as the death occurred within six months of filing bankruptcy the trustee can claim the property.

This issue comes up more often in Chapter 7 bankruptcies than in Chapter 13. In most Chapter 13s the amount the debtor has to pay to his creditors is determined by his income, and acquiring an inheritance will not make a difference. If the debtor’s payments are based on the amount of his assets though, which is an alternate test in a Chapter 13 the inheritance will make a difference. Also if the inheritance is large enough it could force the debtor to switch from the income test to the asset test.

In a 2014 court case a debtor in Chapter 13 did receive an inheritance and tried to avoid increasing his payments on the grounds that it was more than 180 days past the filing date. The court however ruled that the 180 day rule only applied to Chapter 7. Unfortunately for the debtor the court said that in a Chapter 13 the inheritance could be considered until the Chapter 13 plan was completed, which is normally 5 years.

Living Trusts and Asset Protection

Although wills are the most common way to plan. who will receive property after the owner’s death, living trusts are a popular alternative to wills for estate planning. A living trust, which is also sometimes called a grantor trust or a revocable trust, is a trust you set up during your lifetime in which the person setting up the trust maintains full control over the property by naming himself as both the trustee and the beneficiary of the trust. During his lifetime the grantor will treat the property as his own and upon his death the property in the trust will be distributed according to the terms of the trust. The main reason living trusts are popular is because they enable the decedent’s estate to avoid putting the property through probate after the grantor’s death.

People sometimes ask whether putting property in a living trust will stop your creditors from taking it. Their feeling is that since the assets are no longer in their name someone trying to collect debts from the grantor should not be allowed to garnish the property. As a general rule this assumption is false. Since the grantor still has full control of the property a creditor who obtains a judgment against the grantor can attach his assets in the trust.

I refer to this as a “general rule,” because the laws on trusts are highly technical, and there are ways to set up trusts that will protect the owner’s property from creditors. The common living trusts though that are heavily marketed by lawyers and financial planners do not fall into this category. Therefore the best advise to someone, who is interested in using a trust for asset protection, is to consult an estate planning attorney, who can advise them of exactly what limitations on their control of the property they would have to accept to make it safe from creditor claims.

Tax Returns Of Individuals Filing Bankruptcy

A person filing a Chapter 7 bankruptcy must provide the trustee a copy of his most recent Federal Income Tax Return at least seven days prior to the creditors meeting. This requirement is contained in Section 521(e) of the United States Bankruptcy Code. If the debtor fails to meet this requirement the bankruptcy will be dismissed. A question arises though of what happens, if the debtor did not file a tax return for the most recent year, because his income was to low to require him to file. The debtor clearly has no obligation to provide such a return to the trustee, because he was not required to file it under the tax law. Some trustees have taken the position in this case however; that the Bankruptcy Code would then require the debtor to supply a copy of the last tax return he was required to file. If this is only a year or two back, I would advise the debtor to comply with the request on the basic principal that it is usually preferable to keep your bankruptcy trustee happy. If the debtor has not been required to file a return for a number of years though, it creates a greater problem, because the debtor probably has not saved his last tax return. Nor would he be likely to be able to obtain a copy from the IRS. In that case I think one can fall back on the part of the law that says the case will not be dismissed for failure to provide the tax return, since the failure is beyond his control.

Wage Garnishment And Bankruptcy

As a bankruptcy attorney I frequently see individuals, who have had judgments entered against them in court, and who are having their wages garnished to pay the judgments. A judgement creditor can garnish up to 15% of a person’s wages in the state of Illinois.

Bankruptcy will stop the garnishment of wages, since the bankruptcy creates an automatic stay that makes it illegal for creditors to collect debts. However, the garnishment will only stop as of the date when the bankruptcy is filed. Unfortunately, a creditor is allowed to keep any wage garnishments that occur before the bankruptcy. That is why the time to consider a bankruptcy should be when the lawsuit is filed or at least when the judgment is entered. If an individual waits to start when they receive the notice that their wages are being garnished it is often difficult to complete the bankruptcy petition before the first wage deduction is taken. Also if an individual is already having his wages garnished, he may have a harder time finding the money to pay for his bankruptcy.

Inheritances During Bankruptcy

Although it is uncommon, occasionally an individual inherits property right before or right after he files bankruptcy, and the question arises whether the inheritance is subject to creditor claims. As a bankruptcy lawyer I usually have to deliver the unappreciated news in these situations that the answer is yes.

In Illinois an individual filing bankruptcy has a $4,000.00 wildcard exemption that can be applied to inheritances, but the rest is usually subject to creditor claims. If the money is inherited before bankruptcy the trustee may take the remaining balance, and if the inheritance was spent or given away before the filing, you can expect the trustee to scrutinize, if the money was disposed of improperly. If someone inherits property within 180 days of filing the bankruptcy, it is also subject to creditor claims.

Keep in mind that the crucial date is when the decedent dies. If the death is within 180 days of the bankruptcy filing, the inheritance will be subject to creditor claims. It does not matter that the probate of the estate does not begin until after the discharge or whether it takes several years to distribute the funds to the debtor.

Reaffirmation on Furniture Loans

When an individual files a Chapter 7 bankruptcy, they can enter an agreement with a secured creditor to reaffirm the debt. This means that the filer will be liable for the debt even though it otherwise would be discharged in bankruptcy. Since the purpose of bankruptcy is to get a fresh start from debt, as a bankruptcy lawyer I tend to discourage individuals from signing reaffirmation agreements. There are reasons why an individual will want to reaffirm a debt though. A secured creditor can refuse to allow a customer to keep property, if they do not reaffirm, and there are some car lenders who enforce this rule. Also a reaffirmed debt will show on your credit rating as being paid.

One secured debt which I really discourage people from reaffirming are furniture loans. This is because furniture depreciates rapidly from its retail value, and it is seldom worth what is owed on the loan. Furthermore, furniture lenders know the repossessed merchandise has little value, and that after bankruptcy they can no longer try to collect the debt, leaving repossessing the furniture as their only option. Thus when a furniture lender asks for a reaffirmation agreement, they will often accept a fraction of the amount owed in settlement, if you make them the offer. I have also had a number of clients, who have decided not to offer anything to the lender and to take a chance on repossession. As far as I know none of my clients have lost any furniture by taking this approach, since the lenders did not think the expense of doing a repossession was worth it.

Bankruptcy Means Test For Joint Debtors Living Apart

The bankruptcy means test is the mathematical formula that was inserted into the bankruptcy law in 2005 to determine how much of their debts individuals filing bankruptcy should pay back from their income ,when they file bankruptcy. If the available income shown under the means test is low enough the debtors can file a Chapter 7 bankruptcy, which often means they do not have to pay back their unsecured debts. If the means test shows a higher income the individuals will have to file a Chapter 13 bankruptcy, which requires them to make monthly payments for five years based on the amount the means test says is available.

The means test is computed by taking a debtor’s average monthly income and subtracting out what the bankruptcy law allows as expenses. For most expenses such as food, clothing and utilities the law allows a standard allowance based on the household size. For certain expenses such as taxes, child support, and medical the debtors may use their actual expense.

One problem that the 2005 legislation did not specifically address is what happens, when a husband and wife who are separated file a joint bankruptcy. The formula contains no provision for extra expenses such as duplicate rent or utilities that arise in this situation. And of course realistically, if the law says you can afford to make payments based on the expenses of a single household and you actually have to pay for two households, the plan is not going to work.

The means test however does allow extra deductions for special circumstance, and some separated joint filers have claimed the expenses of a second household as a special circumstance on the means test. This position has had some success in the courts.

Automatic Stay For Co-Debtors In Bankruptcy

When a person files bankruptcy an automatic stay goes into affect by law. This means that a creditor cannot take any action to collect a debt against the individual in bankruptcy. The creditor may not take the debtor to court, garnish his wages, send letter demanding payment, or make collection calls on the phone. The automatic stay though does not generally apply to a co-debtor. Thus when a married couple is jointly liable on most of their debts, it seldom does much good for one of the spouses to file a bankruptcy alone. The creditors will merely go after the spouse, who did not file bankruptcy.

There is a limited automatic stay for co-debtors in a Chapter 13 bankruptcy . The automatic stay will apply to consumer debts signed by a co-debtor in a Chapter 13 bankruptcy and prevent the creditors from going after the debtor’s spouse or other co-debtor. There are several exceptions to this rule though that waters down the protection it supplies. Probably the biggest exception allows the creditor to have the automatic stay lifted, if the bankruptcy plan does not call for paying 100% of the debt. Since most Chapter 13 bankruptcy plans call for paying less than 100% of the debts, this exception will frequently apply.

Substitute Notice of Creditors in Bankruptcy

At the end of 2013 the United States 7th Circuit Court stopped a creditor from reopening a discharged bankruptcy case, because the debtor failed to notify the creditor directly; In Re Herman 737 F 33d 449 (7th Circuit 2013). In this case the debtor listed the creditor on his bankruptcy petition showing an attorney for the creditor, who was not representing the creditor in the bankruptcy, as the address for notifying the creditor. The appellate court felt that this was sufficient notice to give a reasonable opportunity to take action and refused to reopen the case to allow the creditor to object.

As a bankruptcy attorney I of course have seen many cases where it is difficult to find an address to notify a creditor, and it is always good to see the court accept a reasonable effort, even if the address used for a creditor does not end up creating the best notice available. There are too many cases of creditors, who have moved or have gone out of business, or in the more shady category are purposely making it hard for their disgruntled customers to find them. The problem has been aggravated by advancing technology. Many people now pay loans through web sites that do not bother to provide an address for the lender. Unfortunately, the bankruptcy court still sends out notices of bankruptcy by mail, which requires a mailing address, rather than a website.

Surrendering A House During Foreclosure

While most people, who have fallen behind in their mortgage payments, would like to stay in their houses for as long as possible, there are some homeowners, who would like to just leave and put that all behind them. As a bankruptcy attorney I have seen a number of clients in this position, and unfortunately they cannot just send the keys to the mortgage company and have everything over with. The problem is even, if the homeowners move out they can still have potential liabilities. Someone could be injured on the property and sue for damages, or their local village may start citing them for violating ordinances by not keeping the property maintained and impose fines for these offenses.

The homeowner does not escape liability until the title to the property transfers in the foreclosure sale. In Illinois a foreclosure sale cannot take place until 210 days after the homeowner is served with a summons for the foreclosure complaint. The process frequently takes longer than the minimum, and there is really nothing a person can do, if their mortgage companies take their time in pushing a foreclosure through the court. There are legal procedures, which allow the homeowner to surrender the property to the mortgage company, such as a deed in lieu of foreclosure, but these require the mortgage company consents, and homeowners asking for deeds in lieu of foreclosure usually become frustrated by the failure of anyone in the mortgage company to get around to responding.

Although it is not always feasible, I usually believe the best advise for homeowners, who are going through foreclosure, is to just stay in the house as long as possible. They are receiving free rent during what frequently turns out to be a very long time. Furthermore, they are not doing anyone any favors by moving out early. Rather this just leaves the mortgage company with vacant property subject to damage by vandals or the weather during the many months it takes them to get around to finishing the foreclosure.

Surrender of Car After Filing Bankruptcy

Individuals filing a Chapter 7 Bankruptcy are frequently behind on their car payments, and if they are not able to catch up on the arrearage, they will generally have to surrender the car. Since most people need a car for survival in the modern world, they usually want to know how long they will be allowed to keep the car. The answer varies depending on the facts.

An automatic stay goes into affect when a bankruptcy is filed, which forbids a creditor from taking any action to collect a debt. This prevents the car lender from legally repossessing the car for non payment. A creditor can bring a motion to lift the stay and request the bankruptcy court to allow them to repossess the car without waiting for the end of the bankruptcy. This involves additional attorney fees though, which often makes the lender feel it is better off by waiting until the automatic stays expires. Furthermore, the motion will still take several weeks to go through the court. If such a motion is brought in your case, you should ask your bankruptcy attorney how long he believes it will take.

If no other arrangement is made the automatic stay on a vehicle loan expires thirty days past the creditors meeting. In the Northern District of Illinois creditor meetings currently occur about a month the bankruptcy is filed. So in most cases a Chapter 7 Debtor may keep the car for at least two months after the bankruptcy filing.

School Tuition And Bankruptcy

When an individual files bankruptcy an automatic stay goes into affect. This means that creditors are not allowed to take any action to collect a debt, while the bankruptcy is pending in court. After the debtor receives a discharge in bankruptcy an injunction goes into affect, which forbids a creditor from taking action to collect a debt.

Actions that are forbidden under the automatic stay and the injunction go beyond the most obvious, such as demanding payment or garnishing wages. It can also include less direct actions such as utilities cutting off services for fees owed before the bankruptcy filing, or car lenders refusing to release the title on cars, which they are not willing to repossess.

One of the institutions that seem to take questionable actions in regards to these rules are schools. Schools frequently will not allow students to graduate or provide students with transcripts, when they have unpaid tuition or fees, even if those charges are discharged by bankruptcy. Sometimes schools have attempted to get around this rule by claiming the debts are student loans, which makes them non-dischargeable in bankruptcy. However, last year the Bankruptcy Court case in the Southern District of Indiana made it clear this position is not so easy to support. In Re Jessica Oliver made it clear that an agreement to pay tuition when a student takes classes is not a student loan. While the court felt this agreement creates a debt, it did not qualify as a “loan” because there was no advancement of funds from the creditor to the debtor or any agreement made when the services were provided to delay payment to some future date.

Additional Child Tax Credit

An individual taxpayer filing a Federal Income Tax return can claim both an annual exemption for a dependent child (a $3,950.00 reduction in taxable income in 2014) and a child tax credit of $1,000.00 for each child. The child must live with the taxpayer, be under 17 years of age, and must be a citizen or resident of the United States.

The child tax credit is not generally refundable, which means the taxpayer will only receive the benefit, if he owes enough income tax to offset the credit. As a bankruptcy lawyer I often see cases where people raising children do not have enough income to generate taxes in the amount of the credit and thus cannot take advantage of the credit.

However, there is an exception that can sometimes allow low income taxpayers to still receive the credit. The credit will be refundable to the extent of the greater of (1) 15% of the taxable earned income for the years 2013 or 2014; (2) in the case of taxpayers with three or more children the excess of his social security taxes for the year over his earned income credit.

Valuation Penalty On Tax Returns

As a bankruptcy lawyer I know that tax problems can add to a person’s financial woes, and what can aggravate an individual’s tax problems is the array of penalties that are contained in the Internal Revenue Code.

One such penalty is what is called the substantial valuation penalty. It applies to any value or adjusted basis stated on a tax return that is 150% or more of the correct figure. It also applies to transfer price adjustments between related taxpayers when the price of property or services is less than 50% or more than 200% of the correct figure. It also applies, if the IRS makes a net adjustment to taxable income between related taxpayers that exceeds $5,000,000 or 10% of the taxpayer’s gross receipts.

The penalty normally equals 20% of any underpayment of tax that results from the misstatement; however, it rises to 40% if it is considered a gross misstatement. A gross misstatement would be one that is at least twice as large as a misstatement that would generate the normal payment.

Refiling Bankruptcy After Dismissal

As a general rule, when a court dismisses a Chapter 13 bankruptcy , the debtor may file another Chapter 13 bankruptcy, as soon as he can get the paperwork together. This is sometimes done intentionally, when the initial bankruptcy is running into problems that can be cured in a new filings. One point that a person taking this strategy must keep in mind though, is that he will have to file a motion within 30 days to retain the automatic stay in the second bankruptcy.

One exception the Bankruptcy code makes to this rule bars a debtor from filing a new Chapter 13 bankruptcy for 180 days after he voluntarily dismisses a prior petition after a creditor has filed a motion to lft the automatic stay. The situation Congress is attempting to prevent is a debtor putting off the legal repossession of property by using serial bankruptcy filings. For example a mortgage company might file a motion to lift the automatic stay to allow it to proceed with a legitimate foreclosure sale of the debtor’s home. Without this exception the debtor would merely have to wait until the day before the foreclosure sale, and then voluntarily dismiss his petition and immediately file a new one.

Tax Limitations on Meals and Entertainment Expense

The Internal Revenue Code limits the amount of tax deductions a taxpayer may take on meal and entertainment expenses. The law reduces the tax deduction to 50% of the taxpayer’s actual cost of the meal or entertainment expense. While meals for entertainment such as taking a customer to a fancy restaurant obviously fall into this category, the limitation also applies to meals connected with travel. For example if a bankruptcy attorney flies from Libertyville, Illinois to New York city to gather evidence for a trial, he will be subject to this rule. If he eats lunch at McDonalds during this trip, he will only be able to deduct half the price of his hamburger and fries.

The limitation does not apply to an employee, who is reimbursed for business related meals and entertainment by her employer. As long as proper records are kept in that situation, the employee actually ignores these transactions on her personal tax return. She does not take a deduction for the expenses, and she does not have to report the reimbursements as taxable income. Rather the employer may take a tax deduction for these meal and entertainment items as a business expense, and the employee will be subject to the 50% limitation.

Exceptions to Innocent Spouse Tax Relief

The general rule is that anyone filing a joint tax return is fully responsible for the tax liability of his or her husband or wife. The Internal Revenue Code however contains the innocent spouse relief provisions that allow a husband or wife to avoid this liability in certain situations where it would be inequitable to make them pay. A classical example of when these provisions were meant to provide protection might be the husband, who does not tell his wife about an extra fee he earned from a side job, and who then uses that extra money to support a mistress. In this case the wife should be filling out form 8857 to seek relief.

As a divorce attorney will tell you though, there are situations where innocent spouse relief is not available. Specifically it only covers income taxes that are reported on a joint tax return. Furthermore, it is not available if the innocent spouse has already entered into an offer in compromise or a closing agreement with the IRS that settles the liability. Finally, it will not apply, if the spouses transferred assets between themselves as part of a scheme to commit fraud.

Innocent Spouse Relief

The general rule is that filing a joint income tax return makes you liable for any tax due based on the income of either spouse. Because of this when I first started practicing law, a divorce lawyer always told her clients not to file joint tax returns with spouses they were breaking up with. If the other party had secret income, which he or she failed to report on the tax return, the IRS could hold either spouse liable, when the missing income was discovered.

The Internal Revenue Code now contains what is known as innocent spouse relief, which offers some protection in this situation. The initial idea was to allow a spouse, who was unaware and had no reason to be aware of the unreported income, and who did not benefit from the omitted income, to avoid liability for the extra tax. The rule was then expanded to include an exception for the broader category covering situations such as health problems or economic hardship in which it would be inequitable to hold one spouse liable for taxes that the other spouse should be responsible for. Finally, a person filing a joint return can request in the case of deficiencies that the liability for the unpaid tax be calculated separately. This applies if the couple is no longer married or is legally separated.

Health Savings Accounts

Health Savings Accounts or HSAs have been available under the Internal Revenue Code since 2004. They allow an individual or his employer to make tax deductible contributions to the account, which will then be used to pay medical expenses for the individual, when they occur.

To be eligible to take the deduction the individual must only be covered by a high deductible medical insurance plan, which for the 2014 tax year is $1,250.00 for an individual beneficiary and $2,500.00 for a family. The idea is to take advantage of the lower insurance premiums such policies will generate and put money into a savings account in case any medical expenses are incurred. Such plans seem to create the greatest benefit for healthy individuals.

As a bankruptcy lawyer I want to caution that a health savings account may not produce the same protection from creditors that other tax deferred savings plans do. I say may not, because it actually varies from state to state. Some states have passed statutes that allow the exemption for health savings accounts from creditor claims and others have not.

Tax Treatment of Gift Loans

As a bankruptcy lawyer I often encounter people, who borrow funds from friends or relatives to try to get through tough financial times. Seldom do people in this situation consider charging interest on these loans. Under the tax law however loans with below market interest rates between such individuals are considered gift loans. In this situation the tax law will consider that the lender is earning interest at the applicable federal rate. He will then have to pay income taxes on this imputed interest. He will also be considered to be making a taxable gift by not collecting the interest.

Fortunately these rules only apply to large transactions, and very few loans between family members fall into this trap. The rules do not apply to most loans of $10,000.00 or less. Also on loans of $100,000.00 or less the amount of interest imputed will be limited to the borrower’s net investment income, and nothing will be imputed, if the annual investment income is not more than $1,000. The rules are thus principally designed to stop individuals from avoiding taxes by lending funds to poorer relatives, who then turn around and invest the money, but pay a lower rate of tax on the dividends and interest they earn.

Avoiding Gain Recognition On Sale of Residence After Divorce

Under the Internal Revenue Code an individual may avoid paying income tax on up to $250,000.00 of gain on the sale of a principal residence. If a husband and wife occupy a residence jointly, they are able to avoid tax on up to $500,000.00 of gain on the sale, even if the home was only in the name of one spouse. One of the requirements for this exclusion though is that the property sold must have been used as the principal residence of the taxpayer for 2 of the 5 years before the sale.

The 2 of 5 year rule might create some concern, if the couple separates and one spouse moves out for more than 3 years before the sale. This is not an unusual situation, and in fact a divorce lawyer will frequently recommend such an arrangement. This can allow minor children to remain in their home with one parent until they are older. Then once the children meet the specified age, the house may be sold, and both parties may receive their share of the equity in the home.

Fortunately this does not force the spouse, who moves out, to pay tax on his or her share of the gain. The law allows an individual, who moves out of a home under a divorce or separation agreement, to still treat the home as a principal residence during the period he or she continues to own the residence.

Reporting Capital Gains On Installment Method

People, who have owned property that has appreciated in value, such as rental real estate held for a number of years, sometimes make a large profit, when they finally sell the asset. While the receipt of the sale proceeds from such transactions can give the seller a warm tingly feeling inside, the joy is often tempered by the fact that he or she will have to pay capital gains tax on the profit. Yet the capital gains tax will only take part of the money received, so the seller tends to still be better off.

A trickier situation arises though, when the property is sold under a long term contract. If the taxpayer receives only a small portion of the proceeds in the first year, but has to immediately pay tax on the entire profit, this can create a cash flow squeeze that can be difficult to manage or maybe even the type of situation that would send some people looking for a bankruptcy lawyer .

Fortunately, the Internal Revenue Code allows taxpayers to report the income from such sales under the installment method. Under the installment method the taxpayer reports only the profit percentage on the payments received in each tax year. Of course there are situations where the installment method is not available. It cannot be used by dealers in personal property or for the sale of publicly traded securities. There are also restrictions to taking advantage of the rules on sales between related parties.

Day Care Tax Credit And Divorce

A taxpayer may claim a credit on his Federal Income Tax return for the cost of daycare of a dependent, if the costs allow him or her to be gainfully employed. The credit is 35% of the qualifying dependent care expenses for taxpayers with adjusted gross income of $15,000.00 or less. It declines by 1% though for every additional $2,000.00 of income until it reaches 20%. The credit can be taken on up to $3,000.00 of costs in the case of one dependent and up to $6,000.00 in the case of two or more dependents. Thus the maximum credit is $2,100.00 . A taxpayer earning $100,000 a year with one dependent could take a maximum credit of $600.00.

One of the requirements for the credit is that the child must live with the taxpayer for more than six months of the year. As a divorce lawyer I often see parents trying to claim the credit on day care expenses, because the divorce judgment allows them to claim the exemption for the dependent on his or her tax return. This is not correct. Only the taxpayer who provides the principal residence for over six months may claim the credit. Unlike the dependency exemption it may not be transferred by agreement.

Taxation of Long Term Capital Gains

One of the advantages of investing is that gains on the sale of capital assets (which includes most property purchased for investment) is taxed at a lower rate than most other forms of income, provided the property has been held for more than one year. A bankruptcy lawyer for example will pay a significantly lower tax on the gains from stocks he has held for three years than he will pay on his earned income.

The long term capital gains rate vary depending on what type of property is involved and what the taxpayer’s income tax rate would be, if the sale proceeds did not count as long term capital tax rates. Thus the tax rate on the long term capital gain for most assets will be a low as 0% or as high as 20% depending on his tax bracket. Long term capital gain from real property that has been depreciated can be as such as 25%, and capital gain from collectibles that have been held for more than a year can be as high as 28%.

Listed Property For Tax Purposes

An individual will frequently own property that he or she uses both for business and personal purposes. For example a divorce lawyer may use his car to run errands on weekends and to commute to his office every day (which is considered personal use) and also to drive to the court house or to meet clients ( which is considered personal use.) The general rule is that the person can take a depreciation tax deduction on the cost of the property for whatever percentage the property is used for business.

However, for certain property, which Congress suspects will lead to abuse, the taxpayer can only take straightline depreciation on the percentage of the cost attributed to business. He is also prohibited from expensing the cost or taking bonus depreciation. He is however free to claim a mileage allowance on the business use of a car, which is available to taxpayers in lieu of actual expenses including depreciation. The items covered by these special rules are known as listed property, and the restrictions apply in cases where business use of the property is less than 50%.

Listed property includes automobiles and certain other means of transportation, computers and peripheral equipment not used exclusively at taxpayer’s regular business establishment, and property used primarily for entertainment or recreation.

Disabled Access Tax Credit

As a bankruptcy lawyer I know that the costs of operating a business can sometimes prove too much to keep a taxpayer in the black, and that government regulations can often add to the expenses. Businesses large and small for example spend significant amounts in complying with the Americans With Disabilities Act to provide handicap individuals access to their premises, and while this may be a noble goal, it can add to the burden of entrepreneurs in their struggle to survive. money.

Fortunately Congress has created a special tax credit for eligible small businesses that spend money for this purpose. The credit is fifty percent of the amount the business incurs in complying with the Americans With Disabilities Act. Eligible expenditures are amounts spent for this purpose of between $250.00 and $10,250.00 a year Thus the maximum Disabled Access Tax Credit in any one year is $5,000.00.

To be a qualifying small business for this purpose the taxpayer must have annual gross receipts of less than $1,000,000.00 or have 30 or less full time employees. An employee who works at least 30 hours a week is considered full time.

Tax Deduction For Business Use of A Home

Many individual taxpayers do some income producing work out of their homes and feel that they should be allowed to deduct part of the costs of their home on their income tax returns. For example a bankruptcy lawyer might work on some of his briefs on his home computer on weekends. However, the tax law limits the situations in which the deduction is available.

Basically a taxpayer may take a deduction for business use of the home, if it is the principal place of a taxpayer’s business, if the home is used to meet clients or customers, if the home is used to store inventory for a retail or wholesale business ,or the home is used to provide day care services. Also a detached structure from the main residence used for business purposes such as an office over a detached garage can qualify.

Each category also has specific requirements that must be met. For example space must be used exclusively for the business purpose to be deductible as a principal place of business, as a place to meet customers, or as a detached structure from the main residence. A space deducted for meeting customers must involve actual physical meetings, not merely phone calls or emails.

Tax Deduction For Business Use of A Home

Many individual taxpayers do some income producing work out of their homes and feel that they should be allowed to deduct part of the costs of their home on their income tax returns. For example a bankruptcy lawyer might work on some of his briefs on his home computer on weekends. However, the tax law limits the situations in which the deduction is available.

Basically a taxpayer may take a deduction for business use of the home, if it is the principal place of a taxpayer’s business, if the home is used to meet clients or customers, if the home is used to store inventory for a retail or wholesale business ,or the home is used to provide day care services. Also a detached structure from the main residence used for business purposes such as an office over a detached garage can qualify.

Each category also has specific requirements that must be met. For example space must be used exclusively for the business purpose to be deductible as a principal place of business, as a place to meet customers, or as a detached structure from the main residence. A space deducted for meeting customers must involve actual physical meetings, not merely phone calls or emails.

Tax Deduction For Building Repairs

A taxpayer can take an income tax deduction for repairs and maintenance of property used in a business or as an investment. However, the cost of an improvement to property has to the property be treated as a capital expenditure, which means that no tax deduction is available.

In some cases the difference between a repair and an improvement is obvious. Painting a building the taxpayer uses to operate a retail business would be a deductible repair, while adding a second story to the premises would be a non deductible capital improvement. Other items though could fall in a grey area, such as replacing windows or doors with much higher quality windows or doors; and as I know well as a bankruptcy lawyer having to argue with the IRS can prove expensive.

Fortunately beginning in 2014 small businesses can rely on a safe harbor for repair expenses for buildings . Taxpayers with less than $10,000,000.00 of annual gross receipts can now elect to deduct all expenses on a building that costs up to $1,000,000.00 provided the deduction for the year does not exceed the lesser of $10,000.00 or 2% of the building’s unadjusted basis.

Tax Deduction of Business Start Up Costs

When an individual starts a business he or she will generally incur certain costs in starting up the business that are not actually costs of running the business. These would include consultant fees to help plan the business or advertising costs or wages incurred before the business opens.

Since these costs are not an expense of running a business, they cannot be currently deducted on the tax return of the business. Instead they are required to be capitalized and written off on the tax return over 180 months or 15 years. There is an exception that allows the taxpayer to take a current tax deduction for the first $5,000.00 of start up expenses, which for many small businesses would cover the entire expenditures. Any start up costs in excess of $5,000.00 would still have to be written off over 180 months.

As any bankruptcy lawyer can tell you though, many new ventures do not stay in business for 15 years, and an entrepreneur, who discontinues operations before the amortization period is complete will want to know what happens to the costs that he has not deducted before he closes. Fortunately, the tax law allows these remaining costs to be deducted as a loss in the year the business is disposed of.

Tax Deduction For Business Software

As a bankruptcy lawyer I have seen that software can be a substantial expense in a business, and if the business is going to succeed an entrepreneur needs to make sure to take an income tax deduction for the costs of acquiring software.

If one purchases software for a business the general rule requires that he or she amortizes it for tax purposes over 36 months. Most small businesses however can get around this through Section 179 of the Internal Revenue Code, which allows taxpayers to expense rather than depreciate equipment purchases up to a certain dollar limit. If the software is purchased as part of the acquisition of a business however, it needs to be amortized as an intangible asset over 15 years.

Generally a taxpayer can take a current tax deduction for the cost of developing software for use in a business. Rental payments for leased software are deducted currently the same as any other rental payments.

Taxation of Qualified Dividends

Most corporate dividend are taxable income to the recipients; but, if it is a qualified dividend the income is taxed at the capital gains rate rather than at the rate for ordinary income.

As an estate planning lawyer I have seen that this break can produce a significant amount of tax savings; however, qualified dividends must comply with certain rules.

Qualified dividends generally must be from domestic U.S. corporations, although there are some foreign corporation dividends that also qualify such as possession corporations and foreign corporations covered by certain tax treaties. The dividends cannot be from tax exempt corporations, mutual savings banks, or on employer securities owned by an ESOP. Qualified dividend treatment also requires a holding period for the stock of at least sixty before or after the ex-dividend date (90 days for certain dividends on preferred stock). They will also not qualify if the taxpayer is required to make related payments with respect to positions on similar property, or if the taxpayer elects to treat the dividends as investment income.

Taxation of Personal Injury Awards As a bankruptcy lawyer I frequently deal with people who have been injured in accidents, and some of them are able to bring lawsuits to recover damages based on the injuries. One advantage that many people do not realize they have in this situation, is that damages received in a lawsuit for a personal injury are not subject to income taxes. Like what seems to be the case with all tax rules however, there are specific rules that need to be followed. The payment has to be paid for compensation of the injury, which means that punitive damages are fully taxable. Emotional distress is not considered a personal injury, but if the emotional distress is caused by an injury or sickness the non punitive damages for emotional distress will be excluded from taxable income. The exclusion also applies to recoveries of any medical expenses attributed to emotional distress.

Collection Efforts When A Debtor Is About To File Bankruptcy

When an individual or a business files bankruptcy, the bankruptcy law attempts to maintain some equality among creditors in dividing up whatever funds are available to pay debts. Following the same philosophy Section 547 of the bankruptcy code can allow a bankruptcy trustee to recover payments made to creditors within 90 days before the bankruptcy was filed.  The idea is that these creditors are receiving preferential transfers, and the funds should be divided among all the creditors.

It can come as quite a shock to a business person, who feels he was only being paid for goods or services provided, when he gets a letter from a bankruptcy trustee wanting a payment returned , because the customer filed bankruptcy within 90 days after the payment. The creditor in this case can argue that the transfer was made in the ordinary course of business , which is a defense against the recovery of a preferential payment in bankruptcy.  What constitutes the ordinary course of business is a question of fact, and the courts look at such points as how long the parties have been dealing with one another and what the sales and payment patterns were before the 90 day period.

What might strike some lenders as unfair is that increased collection efforts during this 90 day period could destroy the ordinary course of business defense.  Frequently, debtors will be having trouble paying, if they are close to bankruptcy, and it seems that the ordinary business practice might be to pick up collection efforts, when someone is not paying.  Nonetheless this can be used against the lender, when a trustee attempts to recover preferential transfers.  

Employer Dependent Care Assistance

As a bankruptcy attorney I am well aware of the large bite that can be taken out of a working parent’s budget for child care. Thus if a parent is fortunate enough to have an employer who assists with his or her daycare expenses the tax treatment of this assistance can make a significant difference. The employee can exclude up to $5,000.00 such assistance from taxable income ($2,500,00 for a married individual filing separately), provided this does not exceed the employee’s earned income or the lower paid spouse’s earned income in the case of a married couple. The expenses must be ones that would qualify under the child care credit rules, and unfortunately the amount of employer assistance for child care reduces the amount of expenses available for the child care tax credit.

Tax Deduction For Alimony

Alimony or “maintenance” as it is officially known  under Illinois Divorce Law, is a payment made to support one’s spouse after a divorce or separation.  It is treated differently than a property settlement or child support for tax purposes, since alimony will be deductible on the payor’s  income taxes, and it will be taxable income to the spouse receiving the payment.

Since divorce frequently leads to financial hardship on the part of one or both of the parties,  it seems important that, if a divorcing couple wants to preserve a certain tax treatment, they should make sure they include the appropriate terms in their divorce agreement or judgment.

To receive the proper tax treatment alimony must be cash payments made under a legal divorce or separation instrument, such as a binding divorce or separation agreement, a divorce or separation judgment or a temporary support order.  Also the payments must end at the death of the spouse receiving the payments.

While there is no requirement for how long alimony payments must run, the tax deductible portion will be reduced, if the payments decline too quickly during the first three years.

Mortgage Debt Forgiveness In 2014

When debt is forgiven, the debtor has taxable income under Internal Revenue Code Section 108. This is the general rule, but to deal with the foreclosure crisis Congress created an exception for the cancellation of mortgage acquisition indebtedness on the taxpayer’s principal residence of up to $2,000,000.  Acquisition indebtedness also  includes refinancing of the mortgages used to purchase homes to the extent the refinanced amount does not exceed the original indebtedness.

Unfortunately for many homeowners the exception for taxation of home mortgage indebtedness expired at the end of 2013, however there are still several rays of hope for persons going through a home foreclosure or a short sale.  In the first place in recent years Congress has seemed unable to get their work done by year end, and they have fallen into a habit of letting  tax breaks expire through inaction, which they eventually get around to reenacting retroactively.  Many people are thus predicting that our lawmakers will still extend the treatment of mortgage debt forgiveness at least through 2014.  

There are also two other exceptions to the cancellation of indebtedness income that often apply to taxpayers losing their homes. These are bankruptcy and insolvency.