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.