The
Bankruptcy Code provides for six separate types of bankruptcy
proceedings. Since Chapters 9 and 12 are available only to municipalities
or family farmers, respectively, and Chapter 15 concerns foreign
proceedings, they will not be discussed in this article. See our
separate discussions on Bankruptcy
Planning and Involuntary Bankruptcies.
Chapter
7
A
Chapter 7 liquidation proceeding is available to individuals,
partnerships, and corporations. The debtor is allowed to keep
exempt assets. For individuals filing bankruptcy in Florida, the
exemptions are primarily determined by Florida law. They include
the debtor’s homestead, (subject to a cap of $125,000.00
in equity if owned less than 1215 days), a debtor’s interest,
not to exceed $1,000.00 in a single motor vehicle, a debtor’s
interest in any professionally prescribed health aids, monies
paid into the Prepaid Post-Secondary Education Expense Trust Fund,
and $1,000.00 per individual in miscellaneous personal property.
Certain other assets such as the cash surrender value of life
insurance policies, annuity contracts, IRA’s and pension
plans may be exempt also. All non-exempt assets must be turned
over to the Chapter 7 trustee for liquidation and distribution
to creditors.
For individuals
filing Chapter 7, most debts, including some tax obligations,
are discharged (see discussion below). Some debts, including recent
tax obligations, trust fund obligations, child support and alimony
generally cannot be discharged. Other debts may not be discharged
if the creditor can prove improper conduct on the part of the
debtor.
Chapter
13
A
Chapter 13 bankruptcy, or "wage earner reorganization"
is available only to individuals with regular income. It requires
that the debtor file a plan providing for payment to creditors
over a period of up to five years. The benefits of a Chapter 13
include the ability to reinstate a home mortgage that is in default,
stop IRS collection efforts while payments are made, the ability
to retain non-exempt real estate and personal assets, and a broader
form of discharge.
Chapter
11
A
Chapter 11 reorganization is available to individuals and businesses.
Due to the higher court fees, reporting requirements and legal
fees involved in a Chapter 11, it is seldom used by individuals.
However, it may provide individuals and businesses with an opportunity
to reorganize their debts and make arrangements to pay all or
a portion of the debts, or sell the business, while obtaining
protection from creditors. A Chapter 11 generally provides more
flexibility than a Chapter 13 reorganization for individuals.
Dischargeability
of Taxes in Bankruptcy
Most
individuals are unaware that they may be able to discharge some
or all of their older income tax obligations in bankruptcy. Dischargeability
of these taxes turns on the question whether or not they are "priority"
claims. Tax obligations which are non-priority are dischargeable.
The
Bankruptcy Code provides that taxes assessed by a governmental
agency which are based on income (income taxes) lose their priority
status when:
(a)
the tax return, with all extensions, was due more than
three years prior to filing for bankruptcy protection;
(b)
a return was filed at least two years prior to the filing
for bankruptcy relief;
(c)
the tax obligation was assessed at least 240 days prior
to filing; and
(d)
the tax payer is not guilty of fraudulent conduct or tax evasion
and has not signed an offer in compromise or other settlement
agreement.
Certain
penalties and interest may also be dischargeable. Penalties designed
to compensate the agency for actual loss are non-dischargeable
while those which are punitive in nature may lose priority and
become dischargeable. Employment taxes are not dischargeable regardless
of the age of the tax claims. This is true whether the obligation
arose because the debtor was the employer or a responsible officer.
Bankruptcy
protection also provides a means to stop IRS collection procedures
for a period of time while payments are made. Bankruptcy Code
§ 362, which grants debtors automatic relief from collection activity,
applies to the IRS in the same manner as other creditors. The
period of relief depends on many factors, including whether the
tax payer files for relief under Chapter 7, 11 or 13. Priority
and non-priority taxes can be treated in a Chapter 11 or Chapter
13 plan and paid out over time. The bankruptcy stay remains in
effect until the Plan is completed or the case dismissed. This
may allow a business which has been seized by the IRS to re-open
and operate under a Chapter 11 Plan without interference from
the IRS or other creditors. The filing of a Chapter 7 stays all
collection proceedings until the entry of a discharge or dismissal
of the case.
This
article is not intended as a substitute for competent legal or
accounting representation, but merely as a guide to help you decide
whether you need the services of a licensed attorney or CPA.
