Can Bankruptcy Survive the Death of the Debtor?

by Stephen Kass on October 4, 2012

There are instances where a debtor files for bankruptcy, and subsequently dies before the bankruptcy case is settled.  The debtor is the one filing for bankruptcy and in need of a fresh start, so it may be assumed that after the debtor’s death the case would be thrown out.

The death of a debtor does not automatically mean his or her case is over.  The Bankruptcy Code permits cases to continue after a debtor’s death in both Chapter 7 and Chapter 13 cases.

Rule 1016 of the Federal Rules of Bankruptcy Procedures governs the rules of death or incompetency during a bankruptcy proceeding.    Rule 1016 permits bankruptcy to continue following the death of a debtor.  The Rule states, “Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.”

Similarly, in a Chapter 13 case, bankruptcy can continue after a Debtor’s death if the continuation is in the best interest of the parties.

The debtor is gone, but the continuation of the bankruptcy is significant to those the debtor leaves behind.  If the bankruptcy is permitted to continue, and the debtor’s debt is discharged in a Chapter 7 case, the debtor’s beneficiaries are permitted to take the debtor’s assets without having to account for all the debtor’s debt.

In a Chapter 13 case, the debtor’s heirs may not be able to receive the assets so seamlessly.  In a Chapter 13 case, debt is not necessarily discharged.  Instead, the debtor works with the creditor to create a repayment plan.  The repayment plan tends to be funded by the debtor’s income, and is based on what the debtor can afford after his or her expenditures.  Because the debtor is dead, he or she no longer has income to fund the plan.

It may be possible for a family member to fund the plan if they are willing and able.  A loved one may be particularly willing to fund a plan when the bankruptcy was filed to address a real estate issue or stop a foreclosure.

Whether a bankruptcy continues can be a matter of inheritance laws, which vary from state to state.  It is important to contact an experienced attorney to help determine the best course of action.

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Tax Offer in Compromise

by Stephen Kass on September 10, 2012

What is an Offer-in-compromise (“OIC”)?

An offer-in-compromise is an out of court agreement between a taxpayer and the taxing authority that resolves the taxpayer’s tax liability. Taxing authorities have the ability to settle, or compromise, tax liabilities by accepting less than full payment under certain circumstances.

Under what circumstances can an OIC be made?

The Internal Revenue Service recognizes three (3) circumstances by which an taxpayer’s liability can be compromised:

  1. Doubt as to Liability – Doubt exists that the assessed tax is correct.
  2. Doubt as to Collectibility – Doubt exists that you could ever pay the full amount of tax owed.
  3. Effective Tax Administration – There is no doubt the tax is correct and no doubt the amount owed could be collected, but an exceptional circumstance exists that allows them to consider the taxpayer’s offer.

Doubt as to Collectibility

The most common reason for an OIC is doubt as to collectibility. The inquiry in this type of OIC is substantially similar to the inquiries made in a bankruptcy; i.e. Income is lower than acceptable expenses, Insufficient assets to satisfy the debt if liquidated, etc. Many taxpayers file an OIC after receiving a discharge in bankruptcy in order to settle non-dischargeable tax debt.

How much do you have to Offer when filing an OIC for doubt as to collectibility?

An amount must be offered greater than or equal to the taxpayer’s reasonable collection potential (RCP). The RCP equals the net equity of the taxpayer’s assets plus the amount the authority could collect from the taxpayer’s future income.

Important steps to take in anticipation of making an OIC

A taxpayer is not eligible for consideration of an OIC on the basis of doubt as to collectibility or effect tax administration if:

  1. They have not filed all tax returns; or
  2. The taxpayer is involved in an open bankruptcy proceeding.

Why is it more advantageous to have an attorney represent the taxpayer in their offer as opposed to handling it on their own?

Attorney representation is important in an OIC because of the intricacies of the paperwork required and to make sure that correspondence is timely satisfied when deadlines and limitations have been set by the taxing authority. In addition, dealing with the taxing authorities is rarely pleasurable and having a professional representation in these matters eases much of the stress that these situations can create. A good attorney should also be able to contemplate how an offer will affect the future dischargeability of certain tax debts in contemplation of a possible future bankruptcy. (the statutes of limitations governing tax debts and their dischargeability in bankruptcy are stayed while an offer is pending)

What types of information will the taxing authority ask for?

In addition to the typical Offer form (656 for the IRS) and the detailed financial information sheet (433-A for the IRS), the taxing authority will typically ask for the following information:

  1. Appraisals of all property of the taxpayer including a detailed appraisal by a licensed appraiser with market comparable for any real property;
  2. Bank Statements and copies of canceled checks for the year preceding the OIC;
  3. Copies of all insurance policies maintained by the taxpayer;
  4. Statements and Affidavits attesting to the truth of certain statements;
  5. Copies of pay stubs;
  6. Copies of all federal and state tax returns for any years covered by the OIC;
  7. Copies of the Discharge Order and all paperwork from the taxpayer’s previous bankruptcy filing if there was one;
  8. Hardship Letters detailing the reasons for the taxpayer’s non-compliance with the taxing authorities;
  9. All the preceding information for the taxpayer’s spouse if married.

One important item to remember is that unlike a bankruptcy proceeding, an OIC is strictly voluntary for the taxing authority which means that they can request any and all information that they wish. Obviously their requests are going to be limited to items that help them assess the taxpayer’s financial situation but can still be quite reaching and evasive.

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Real Property Transfers and Bankruptcy Tax Exemptions

September 6, 2012

Section 1146(c) of the Bankruptcy Code states that when real property is transferred under a plan confirmed under Chapter 11, the transaction is tax exempt. Congress enacted this provision because a reduction in tax obligations assists in producing successful reorganization plans by encouraging debtors to dispose of unnecessary assets, and by increasing the amount of […]

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Public Pension Fund Files Bankruptcy

September 5, 2012

On April 17, 2012, the Northern Mariana Islands Retirement Fund (Fund), a United States public pension fund, filed for Chapter 11 bankruptcy. The Fund provides retirement benefits to government employees of the Commonwealth of the Northern Mariana Islands (Commonwealth).  The Commonwealth is a U.S. territory.  The Fund listed $256 million in assets and $1 billion […]

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Co-Debtor Stays

September 3, 2012

The co-debtor stay automatically prohibits any act or civil action to collect any consumer debt from an individual liable with the Chapter 13 Debtor, or against an individual who has secured the debt. Any act to collect from a co-debtor can even include actions such as placing a negative mark in the co-debtor’s credit report. […]

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Bankruptcy Discharge Objections

September 1, 2012

The bankruptcy circuits were split as to whether the protection afforded to a debtor concerning time limits for creditors to object to a bankruptcy discharge may be forfeited, if a debtor waits too long a period of time to assert that an objection was not made within the stated time limits. In January, the Supreme […]

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Solutions for the Bankrupt Taxpayer

August 28, 2012

I. Tax Collection Fundamentals: Non-Bankruptcy Alternatives 1) How does an assessment come into existence? a. Tax Return Filed.  When a tax return is filed showing a tax due, the IRS assesses that tax. [IRS §6201(a)]. b. Deficiency Assessment.  A deficiency is defined under IRC §6211 as being the actual or correct tax over (or less) the tax shown on […]

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Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

August 25, 2012

President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into Law on April 20, 2005. Most of the provisions of this new act will come into effect in180 days after the day of enactment. Thus, October 17, 2005 is the effective date for the new law. Our Office prepared an informative […]

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Different Ways to Deal With Your Mortgage Arrears and Other Liabilities

August 22, 2012

This article is written in response to the numerous readers’ questions regarding the ways to save the house when the times get tough and homeowners fall behind on their mortgage obligations. It is not a secret that the amount of foreclosure sales in the country is at its highest level, and a lot of people […]

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Discharge of Unfiled Taxes under the Bankruptcy Abuse Prevention and Protection Act of 2005 (BAPCPA). No More “Super” Discharge?

August 21, 2012

The basic concept of a chapter 13 bankruptcy filing historically was to allow individual debtors to reorganize their finances. The policy of giving the debtor a chance to have a fresh start was foremost behind Congress’ intent to provide the debtor with a broad discharge of his/her debts incurred through false representation, fraud or recent […]

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