Bankruptcy Bits

Chapter 11 filings up 49%

Under the amended bankruptcy laws (BAPCPA), Chapter 11 is far more restrictive, costly and burdensome, but those factors have not prevented growing numbers of business bankruptcy filings over the past year.

According to statistics recently released by the Administrative Office of the U.S. Court, in fiscal year 2008, (which is the 12 month period ending 9-30-08,) Chapter 11 filings rose 49% from the prior 2007 fiscal year. The actual numbers were an increase to 8,799 from 5,888 cases.

In reviewing all types of business cases that were filed, the numbers show a jump from 25,925 cases to 38,651, which is a 49% jump.

The same increased filings are found in almost every type of bankruptcy filing, except for the rarely used Chapter 12 farm filings. Nationally, Chapter 7 liquidation cases were up 40%, while consumer wage plans under Chapter 13 were up 14%, but likely to continue rising with the continued foreclosure problems facing many people trying to save their homes.

In Massachusetts, there were a total of 15,636 filings, of which 11,525 were Chapter 7, 3957 were Chapter 13, 149 were Chapter 11 and 4 were for Chapter 12 cases.

It appears that bankruptcy filings are on pace to increase over the 2008 filings, so more record filings can be expected.

By: Michael B. Katz, Esq.

Chapter 7 and taxes – can taxes be discharged in bankruptcy?

Contrary to popular belief, taxes can sometimes be discharged in bankruptcy. Specifically, the discharge provisions for Chapter 7 applicable to taxes are found in §523(a)(1). The first exception to discharge is simply stated: if the tax is entitled to priority, it is not discharged. A quick review of these priority taxes is as follows:

• *Income taxes where the return WAS DUE within the 3 years prior to the petition being filed. If the return was due on August 15, 1990 (the debtor requested an extension), the tax is priority in any bankruptcy filed prior to August 16, 1993. This is known as "the three year rule." §507(a)(8)(A)(i).
• Income taxes where the assessment was made within 240 days, prior to the petition date. This period of time is tolled while an offer-in-compromise is pending, plus 30 days. This is "the 240-day rule." §507(a)(8)(A)(ii).
• Income taxes are a priority where the tax remains assessable and the tax does not arise from 1) a non-filed tax return 2) a delinquent return filed within 2 years of the petition, or 3) a fraudulent return. For example, if the debtor has extended the assessment period by agreement with the IRS under 26 USC §6501(c)(4) or if the assessment has been prohibited due to litigation pending in the Tax Court, 26 USC §6231(a), the tax is assessable after the bankruptcy petition is filed and is granted priority. §507(a)(8)(A)(iii). Also see In re Massoni, 20 BR 416 (Bankr KS 1982) and In re Easton, 59 BR 714 (Bankr CD I11 1986).

In addition to priority taxes, other types of taxes are nondischargeable in Chapter 7:

• Taxes for which a return, if required was not filed are not dischargeable. §523(a)(1)(B)(i).
• Taxes arising from a return which was filed within two years before the petition date are not discharged. This is known as "the two-year rule". §523(a)(1)(B)(ii). Taxes arising from returns filed after the petition date are also not discharged. A substitute return prepared by the IRS under 26 USC §6020(b) does not constitute a filed return for this section. In re Bergstrom, 949 F.2d 341 (10th Cir. 1991).
• A discharge is not allowed for taxes where the debtor filed a fraudulent return or willfully attempted in any manner to evade or defeat the tax. §523(a)(1)(C). The conduct must be deliberate, not accidental, and done with fraudulent intent. In re Gathwright, 102 BR 211 (Bankr D Or 1989).

Non pecuniary loss tax penalties (e.g., late filing, failure to pay, negligence, fraud, etc.) are not discharged unless either 1) the tax to which they are attached is discharged or 2) the penalty is based upon events that occurred more than three years before the date of the petition. §523(a)(7). In re McKay v. United States, 957 F.2d 689 (9th Cir. 1992). The "transaction or event" which gives rise to most penalties is the due date of the return.

By: Justin H. Dion, Esq.

Foreclosures – placing blame where blame is due

There are some who believe that amending the Bankruptcy Code to once again allow the Bankruptcy Court to modify residential mortgages is the most expeditious and efficient method to provide equitable relief to homeowners facing foreclosure. Those of us who support and urge immediate action on legislation to grant such jurisdiction to the Bankruptcy Court are of the opinion that real relief will be available to the beleaguered homeowners, and the real value of the "toxic" loans will be established. We believe that those who gambled in the derivative market will be the ones who will appropriately suffer the resulting losses, and perhaps the existence of recourse to relief will both encourage lenders, et al, to negotiated meaningful refinancings and bring sound lending practices back to the mortgage industry.

There are others who oppose the amendment contending that a result would be an increase in the costs of obtaining a mortgage.

This blogger respectfully suggests that legitimate lenders who apply sound lending principles will not be adversely affected by the proposed amendments. Additionally, it is suggested that the amendment will appropriately place the risk of loss where it should be: on the predatory lenders and speculators whose greed precipitated the mortgage foreclosure and financial crisis. The granting of authority to the Bankruptcy Court to recast residential first mortgages will not adversely affect legitimate lenders but will discourage those who prey on the unsuspecting.

By: Eugene B. Berman, Esq.

Buying a home after a Chapter 7 bankruptcy

Filing bankruptcy is not the end of your home ownership dreams. Even people with a recent bankruptcy in their credit history can often get a home loan if careful steps are taken.

The prime reason lenders are typically comfortable in giving a home loan is that a house in itself is an asset, and if the mortgage goes unpaid, a foreclosure can be commenced to recoup the loan amount. Pursuant to FHA guidelines, many lenders will approve a mortgage loan after a period of two years has passed following a Chapter 7 bankruptcy. Generally, individuals who have filed a bankruptcy less than two years ago are not qualified for a FHA loan. In addition, once an individual has been in a Chapter 13 bankruptcy for two years, they may also be eligible for a refinance, provided they have made their last 12 monthly mortgage payments on time.

In contrast, an individual will be eligible for an FHA loan after three years has passed since his/her last foreclosure. FHA will insure mortgages to individuals who have filed for Chapter 7 liquidation bankruptcy two years after the discharge, provided the borrower has re-established good credit and has demonstrated an ability to manage financial affairs. Surprisingly, one of the best ways to increase your chance of getting a home loan may be by opening a new small credit card account right after filing for bankruptcy, and then maintaining the credit card account properly thereafter.


By: Justin H. Dion, Esq.