Friday, January 27, 2012

Bankruptcy Foes: Debt Relief Company Settles With NC Attorney General

by Susanne Robicsek,

Bankruptcy is not something that anyone wants to do, but it is often the best course of action for a consumer in debt. Filing for bankruptcy is often seen as a failure, sign of weakness or immoral. Understandably, people who file don't go around telling everyone how much better life is for them now that they filed, but people sure are quick to mention how terrible it is to file.

In an effort to avoid filing bankruptcy, people will often try many different ways toavoid filing including working with a credit counseling company in a debt management program or a settlement program.

The NC Attorney General Roy Cooper announced in a press release that a settlement has been reached against "The Consumer Law Group of Boca Raton, Florida", a company described in the press release as a "bogus Florida law firm that falsely claimed it would reduce consumers' debts…"

"Debt relief scams take advantage of struggling consumers, adding to their burden instead of helping them get out of debt," Cooper said. "I'm pleased that we've been able to win money back for these consumers, money that can hopefully help them pay off bills and get on better financial footing."

The North Carolina Attorney General's Office sued this particular debt settlement company after consumers complained about all sorts of problems they had with the company.

The settlement by the Attorney General's Office is a nice victory for consumers, however it took a a lot of work and a lawsuit to shut this company down. Sadly, many more of these companies remain in business and more will pop up, playing on the desire of most people to try to honorably settle their debts.

The Attorney General took on one of the really bad companies and won, but the problem is that many of these companies are not acting in the debtor's best interest and they are still out there.

(To see a news video on this story, go here)

Even if reputable, since none of them can offer legal advice since they aren't lawyers, when you go to one of these companies, many just explain the program they offer and never give full information on alternatives that may be better for the individual.

And bankruptcy might be the better option – which is not something you want to discover after you have spent hundreds or thousands of dollars trying the alternatives.

Chapter 13 is a good way to pay what you can towards your debts, but protect you and your assets and keep your creditors away. Some people pay all their debts off inChapter 13 payment plans, but others pay a reduced amount.

Chapter 7 helps you get a fresh start fairly quickly, if you aren't in a position to make payments. You get to keep some of your property (for many people, they keep everything) and can allow you to get your budget balanced and provide for your family.

I encourage people with debt problems to first see an experienced bankruptcy lawyer who can discuss all your options, since I feel that an attorney can explain how bankruptcy works, explain the myths about filing for bankruptcy, but also explore any non-bankruptcy options.

I often encourage clients who might have some discretionary funds available to pay towards their debts to to see a good credit counselor before making up their mind after seeing me. That way they know that they have explored all their options and examine other viewpoints, but that their decision is based upon facts and sound advice.

Debt settlement or debt management programs might make sense for people who earn more money than they need to cover their regular and ongoing expenses, or who have a lump sum to pay towards debts that might not pay them in full.

However in considering these options, you would need to be sure that your budget is sound, and that it not only covers your monthly expenses but also includes things that don't come up every month (like car maintenance, house repairs, medical bills, clothing, etc).

You don't find yourself in financial trouble a few months or years down the road, after you use all your 'extra' funds to pay towards the debt program. Especially when you should have seen those predictable emergencies coming. (Also see Liz Pulliam Weston's Article: The $0 Emergency Fund)

A reputable credit counselor will not charge fees up front in North Carolina.

Charging fees up front for debt reduction, negotiation or debt settlement is not allowed in North Carolina.

The Consumer Law Group tried to get around this law by falsely claiming to be a law firm providing legal services.

For more information on these matters, please call our office at 305 548 5020.

Wednesday, January 25, 2012

Top Ten Bankruptcy Myths Countdown: #8 Bankruptcy Will Ruin Future Credit

by Karen Oakes,

One of the concerns about filing for bankruptcy is that those folks will never be able to obtain credit again after filing for bankruptcy protection and assistance. Most times, nothing could be further from the truth as bankruptcy may actually improve folks' credit score, according to my clients' experiences (and as explained by Smart Money on their website). Every debt collection note on a credit report, every late payment, every negative notation affects a debtor's credit score. Bankruptcy? It doesn't add to the negative credit score; it replaces a number of negatives with ONE negative notation of "discharged in bankruptcy" with the account showing a "zero" balance. That act usually improves a debtor's credit score. As my colleague Doug Jacobs stated in his article on this site, debtors should list all of their debts to insure that a financial fresh start is obtained. There are a number of other ways to improve your credit score.

Post-bankruptcy, acting carefully in making financial decisions improves a debtor's credit rating according to Liz Weston of MSN Money. Jennifer Weston mentions eight credit repair tips in her blog:

1. after your bankruptcy is discharged, check your credit report for errors

2. check your report again

3. make a budget and stick to it

4. be careful when applying for new credit

5. use the automatic payment function on credit so that you won't (ever) forget to make a payment

6. if you have student loans, make SURE you make those payments on time (this will help rebuild your credit)

7. apply for a secured credit card (where you deposit money against future charges)

8. when you do obtain new credit (and you will), do NOT max out the cards. Credit rating is affected by amount of credit available ratio to credit used.

Using the above tips, a diligent debtor will find that even a mortgage is obtainable quickly after filing for bankruptcy, according to Craig Andresen, my Minnesota colleague. Folks who educate themselves about the ways to protect themselves and who act wisely will find that their credit score improves rapidly.

Most folks are entitled to receive one free credit report each year. Those reports can be obtained through www.annualcreditreport.com or by going to each of the three credit reporting agencies:

Experian

Equifax

Transunion

In addition, there are three check/bank account reporting agencies:

Telecheck

Chex Systems

Early Warning Services

Debtors who have had returned checks or overdrawn checking accounts and who find themselves turned down for a new account should obtain a copy (also free) of their report from those agencies as well.

For more information on these matters, please call our office at 305 548 5020.

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Tuesday, January 24, 2012

The Ordinary Business Terms Preference Defense

by Nicholas Ortiz,

The 2005 amendments to the Bankruptcy Code modified the landscape for a key defense to bankruptcy preference actions. Preference actions are when a trustee or debtor in possession sue a creditor for the return of payments made in the 90 days before a bankruptcy. The concept is that creditors that receive more than similarly situated creditors by extracting unusual pre-bankruptcy payments from the struggling debtor should have to give the money back so that it can be shared equally with their peers. This creates a disincentive to employ coercive collection techniques when a debtor is teetering on the edge of bankruptcy. However, there is a defense to a preference case that allows the recipient of the money to keep it if the transfer was "ordinary". There are several other defenses to preference actions (some of which I discuss here), but I will be highlighting the ordinary course of business defense, and more specifically, the "ordinary business terms" prong of that defense.

Section 547(c)(2) is where the general defense is found. It says:

(c) The Trustee may not avoid under this section a transfer –
(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.

The "ordinary course of business" prong (subsection A) is known as the subjective test because it concerns the history of dealing between specific the debtor and creditor. The "ordinary business terms" prong (subsection B) is known as the objective test because it concerns what is normal in the industry in which the debtor and creditor do business.

Prior to 2005, a preference defendant had the burden of proving both prongs of the defense, but now either one will suffice. This means that a preference defendant can win by proving that a suspect payment was normal for the industry even if it was not normal in the course of dealing with the debtor. However, much of the case law on the topic is from pre-2005 bankruptcy cases. During that time, when it was necessary to prove both prongs, the objective component was often treated like an afterthought. Now that "ordinary business terms" is its own defense, the question is how will the courts interpret it–and much is still uncertain because many preference cases coming to decision now are still in base cases filed before 2005. However, it is clear that in order to carry its burden on the "ordinary business terms" prong of the defense, a defendant will have to retain a trade expert to prepare a report and testify on the standard payment timing and behavior within the industry group during the preference period. Courts will have wide discretion to assess dueling expert testimony, define what constitutes the relevant industry group, and define the range of what should be considered "ordinary" within that group. There are some obvious challenges in presenting this defense, like obtaining often proprietary trade information within an industry group. Moreover, there is always wide discretion in defining a sample group, and thus much to fight over: Whether the group of businesses in the relevant industry group is defined broadly or narrowly will dictate much, and is within the discretion of the court.
An added factor to consider is the preference defendant's right to demand a jury trial and transfer to the District Court. It has this right when it has not filed a proof of claim in the underlying bankruptcy case (the U.S. Supreme Court's 2011 decision,Stern v. Marshall, does not change this).

For more information on these matters, please call our office 305 548 5020.

Sunday, January 22, 2012

How Long After Filing Bankruptcy Can You Buy A Home?

by Jay Fleischman,

Buy a home after bankruptcy? Seems like a stretch for all but those who win the lottery once the discharge is issued. But play your cards right and you could be worrying about scheduling a closing date sooner than you ever thought possible.

After filing bankruptcy, you're debt free. No more calls, no more lawsuits. Suddenly, the world feels a bit brighter and filled with possibilities. You start looking around your rental and thinking you might want to buy a home.

In order to buy a home after filing bankruptcy, you're going to need to worry about two things. They are:

Your level of savings; and
Your credit score.

Your Savings Account (The Downpayment)

In order to buy a home, you must have a downpayment. Though the land of $0 down mortgages was wonderful for a time, it's gone now. And if there's a broker willing to do the deal for you, run the other way. When you don't have a downpayment, you run the risk of going upside down on your mortgage the first time the Federal Reserve Bank chairman catches the sniffles. Definitely bad idea.

Spend the first year or so after filing bankruptcy focusing on your savings account. Sock away every spare dollar, and then some. Cut your cable or satellite television, consider ditching the landline phone in favor of the cell, and turn off your lights when you leave the room to save on electricity.

Clip coupons. Lots of them.

If you can, grow something useful in the garden rather than pretty flowers that can't feed you.

If you want to buy a home, you need money. Lots of it. Save every dollar you can.

Your Credit Score

Going through bankruptcy will hit your credit score to the tune of about 150 points. Doesn't sound like a lot, but when you remember your credit score tops out at 850 and seldom goes below 400 unless you've somehow lost your pulse, it's pretty big.

You're going to want to get to work on repairing the damage, and fast.

First thing to remember is that you must continue to pay your debts on time. If you've got student loans or a car loan, make those payments without fail. The student lender will report that positive payment stream, though the car lender may not unless you reaffirmed the debt. No reaffirmation? No problem – just keep copies of the cancelled checks and ask the finance company for a payment history before you go to the mortgage broker.

Next is that different mortgage companies may look to different credit reporting agencies – each of which may list different obligations. Some may list your utility payments, others may have the rent bill to the landlord. Keep on top of it all after filing bankruptcy to maximize the chances you can buy that dream home. You also want to check your credit reports after bankruptcy to make sure they reflect your debt-free world.

Finally, consider a single credit card after bankruptcy. Use it every month, then pay it off over a 2-month period to ensure that the payments show up on your credit report. That's going to raise your score as well.

You can buy a home after filing bankruptcy, but the upshot is that you need to take some time to build yourself back up. Don't rush it – Rome wasn't built in a day. With hard work, however, you'll get there just fine.

For more information on these matters, please call our office at 305 548 5020.

Sunday, January 15, 2012

What Is A Debt Relief Agency In Bankruptcy Reform Law?

by Andy Miofsky

The term debt relief agency appears in a legal context for the first time in bankruptcy law in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 [The Act]. The first chapter of this new bankruptcy reform law can be found at Title 11 U.S.C. 101. This is the General Provisions chapter and it contains definitions of words of art used throughout the Act, and includes the term "debt relief agency".

Section 101(12A) defines the term debt relief agency to be any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under section 110. Persons who fail to disclose this status are subject to penalties that could include payment of damages and attorney fees.

In Milavetz vs United States, the Supreme Court of the United States was asked to decide whether bankruptcy lawyers had to comply with the requirement to call themselves a debt relief agency. The Court ruled in a unanimous 9-0 decision that the debt relief agency provisions of the bankruptcy reform act applied to lawyers.

Although the phrase contains the word agency, the definition clearly refers to any person. You may see and hear media advertisements such as newspaper ads, radio spots, or internet ads where a person refers to oneself as an agency. While that appears to be grammatically incorrect, it is in keeping with the legal definition set forth in the new bankruptcy reform law.

An important note, the same section excludes certain types of persons or organizations from being a debt relief agency. including officers, directors, employees or agents. Also excluded are certain creditors, non-profit institutions, and some financial institutions. As are authors, publishers, and distributors of books excluded. A complete list can be found in the statute.

For more information on these matters, please call our office at 305 548 5020.

Friday, January 13, 2012

Bankruptcy Mediation Program Discussed on 89.9 FM

by Chip Parker

Bankruptcy Mediation Program Discussed on 89.9 FM

WHAT: Bankruptcy attorney Chip Parker will join The Honorable Paul M. Glenn, Bankruptcy Judge, and theChapter 13 Bankruptcy Trustee Douglas Neway to discuss the bankruptcy court's new Bankruptcy Residential Mortgage Mediation Program.

WHEN: January 5, 2012 at 9:00 a.m. EST

WHERE: WJCT 89.9 FM or listen live on the internet

DESCRIPION: Earlier this month, the Florida Supreme Court announced that the mandatory State Court Residential Mortgage Foreclosure Mediation Program will cease. This comes as no surprise to the lawyers involved in defending foreclosures in Florida.

Mediation is usually a great way for a plaintiff and defendant to sit down with a neutral arbiter to hash out their differences and come to a resolution that is usually better than continued litigation. Mediation is successful in all types of disputes including personal injury cases, contract disputes and even divorces. However, in these cases, circuit court judges will readily punish a party who fails to attend mediation or who attends but fails to comply with the mediation order.

The RMFM Program was a dismal failure because it had no teeth, and judges were reluctant to punish the mortgage companies for failing to mediate in good faith. In short, the RMFM was a complete waste of time, not because mediation is a bad idea but because most state court judges were not behind the effort.

This past summer, the Bankruptcy Court in the Orlando Division of the Middle District of Florida implemented its own version of the failed RMFM, but unlike the state court version, it has seen a much higher success rate. One Orlando debtor attorney even boasts a 90% success rate, with 18% of his modifications involving principal reduction.

What is the Bankruptcy Court doing differently? Quite simply, it is forcing the mortgage industry to do what it was required to do as a condition to receiving hundreds of billions (not to mention U.S. Treasury's $7 trillion secret loan program ) of taxpayer bailout money, including the government takeover of Fannie Mae and Freddie Mac.

Those mortgage companies and banks who took TARP funds are required to extend a HAMP modification to any homeowner who qualifies. Basically, if a homeowner is unable to currently pay his mortgage, HAMP allows the homeowner to pay 31% of gross monthly income as their new mortgage payment (principal, interest, taxes, insurance and association fees) if the homeowner can demonstrate that he can pay all other existing expenses with the remaining 69% of gross.

New terms will be calculated to make the new mortgage payment sufficient to pay off the loan. That amount must be enough to pay off your mortgage. The mortgage servicer can lower the interest rate, stretch out the mortgage and even add a balloon payment in order to make it work. In some circumstances, the mod may make sense, or there may be too much negative equity in the home to justify walking away or fighting the foreclosure in state court.

Does the bankruptcy mediation program guarantee a residential loan modification? No, but it does make it much harder for a mortgage servicer to reject a modification because of the stringent requirement to act in good faith. For instance, if a servicer rejects a HAMP application, it will have to explain why. Often, a rejection is based upon a miscalculation, and in mediation, the debtor's attorney can demand that the servicer's representative explain his calculations. Often, the mistakes are found and corrected, resulting in HAMP acceptance rather than rejection.

Mortgage modification isn't for everyone, and bankruptcy isn't for everyone. However, the bankruptcy mortgage mediation program is another option for homeowners facing foreclosure.

For more information on bankruptcy matters please, call our office for an appointment at 305-548-5020.

Thursday, January 12, 2012

Bankruptcy Fundamentals: Discharge After Prior Bankruptcy Filings

by Adrian Lapas

Bankruptcy Fundamentals: Discharge After Prior Bankruptcy Filings

Recently, I had cause to go back to re-visit some of the provisions in the Bankruptcy Code relating to when a discharge is entered. Since this is the start of a New Year, perhaps a review of some basics is in order.

For a chapter 7 case, the operable statute is 11 U.S.C. § 727. Section 727 says that a dischargeshall not be granted if a debtor has received a discharge under § 727 in a case commenced within 8 years before the date of the filing of the current bankruptcy case. Seems straightforward enough. If you filed a chapter 7 case 8 years ago, you can't file another chapter 7 case until those eight years have passed.

Well, not exactly. As most bankruptcy practitioners know, a lot of people will file achapter 13 case and then, for some reason or another, have to convert their case to a chapter 7. In that instance, do we look at 8 years from the date of filing or 8 years from the date of conversion? The statute itself supplies the answer–""in a case commenced within 8 years . . ." That means that if the debtor files a 13, that is the date the case was commenced and the correct date for calculating when a debtor then becomes eligible for a chapter 7 discharge. So, if a debtor filed a chapter 13 on 2-1-2004 and converted his case to a chapter 7 on 4-1-2004, the debtor would be eligible for another chapter 7 discharge on 2-1-2012.

If a debtor has previously received a chapter 7 discharge and less than 8 years have passed, does that mean the debtor cannot file another chapter 7 case? Not exactly. Section 109 describes who may be a debtor. There is no provision in § 109 that says a person who had previously been granted a chapter 7 discharge may not fileanother chapter 7 case even though less than eight years have passed since the prior filing. These two provisions taken together merely mean that, if a debtor files a chapter 7 case before eight years have passed since his prior filing, he will not get a discharge of his debts.

Admittedly, receiving a discharge of debts is the whole purpose of filing for bankruptcy, there may be reasons for choosing this course of action. As an example, suppose the debtor has assets that he would like to sell in order to pay his creditors. In particular, if the debtor were to be able to sell his assets and it would be enough to pay the creditors in full, the debtor could file a chapter 7 and allow the trustee to sell the assets. All creditors would then be paid in full and the debtor walks away from his troubles. The chapter 7 trustee deals with all the creditors and the burden of liquidating the assets, that is, selling them.

This can happen when there are secured creditors threatening repossession or foreclosure on an asset with sufficient value to satisfy the claims of other creditors but the debtor lacks the cash to stave off the secured creditor's actions. The foreclosure/repossession is stopped by the automatic stay and the chapter 7 trustee is there to say to the secured creditor, "whoa buddy! Let's see if we can't sell this collateral in a more orderly manner to generate money for all creditors." Chapter 7 trustees, who also get a commission on assets that they sell, have an incentive to maximize the value of the property to the bankruptcy estate (and themselves).

But, let's also be clear that this can be a risky maneuver on the part of the debtor. If the claims of the creditors are not satisfied, the debtor may still owe some of the creditors and will not receive a discharge.

Another interesting provision involves the timing of chapter 13 cases. Under 11 U.S.C. § 1328(f), if the debtor received a discharge under a case filed under chapter 7, he may not get a chapter 13 discharge unless 4 years have passed. If a case was filed under chapter 13 and a discharge entered, the debtor is not eligible for another discharge under chapter 13 for two years.

So, if a bankruptcy case was originally filed under a chapter 13 case and then converted to a chapter 7, which is the correct date? Again, the statute provides the answer. Under either provision, you must determine under which chapter was the prior case filed. If it was filed under a chapter 7, then the debtor must wait four years. If the case was originally filed under a chapter 13, the debtor must wait two years. It does not matter under which provision of the Bankruptcy Code the debtor received his discharge.

So, if you had previously filed a bankruptcy case, it is very important to know under which chapter you filed in addition to knowing under which provision your debts were discharged. Therefore, it is very important to you discuss any prior bankruptcy filings with your bankruptcy lawyer so he or she can make sure that you are eligible for a discharge.

For more information on bankruptcy matters please call our office for an appointment at 305-548-5020

--
Sincerely,

Tatiana, Restrepo, Front Office Manager
From the Law Office of Yoel Molina, P. A.
Office: 305-548-5020
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Tuesday, January 10, 2012

IRS to Chapter 13 Debtors: File Your Returns by February 5!

by Russell A. DeMott

IRS to Chapter 13 Debtors: File Your Returns by February 5!

We all know that individual tax returns are due on April 15 (or a day or two later if April 15 is on a weekend). But Congress inserted a little tax time craziness into sections 1308and 1307 of the new and drastically unimproved Bankruptcy Code of 2005. Section 1308(a) states:

(a) Not later than the day before the date on which the meeting of the creditors is first scheduled to be held under section 341 (a), if the debtor was required to file a tax return under applicable nonbankruptcy law, the debtor shall file with appropriate tax authorities all tax returns for all taxable periods ending during the 4-year period ending on the date of the filing of the petition.

At first reading, this section appears to only be dealing with those returns the debtor "was required to file" prior to the 341 hearing or "First Meeting of Creditors." For example, if it's February 5th, 2012, and I'm a debtor in bankruptcy, it can't be said that I "was required" to file my 2011 return. After all, the IRS gives me until April 15.

For more information on bankruptcy matters please, call our office for an appointment at 305-548-5020.

Monday, January 9, 2012

IRS to Chapter 13 Debtors: File Your Returns by February 5!

We all know that individual tax returns are due on April 15 (or a day or two later if April 15 is on a weekend). But Congress inserted a little tax time craziness into sections1308 and 1307 of the new and drastically unimproved Bankruptcy Code of 2005. Section 1308(a) states:

But like many provision of the Bankruptcy Code, this one's a little murky. And section 1308(b) provides:

(1) Subject to paragraph (2), if the tax returns required by subsection (a) have not been filed by the date on which the meeting of creditors is first scheduled to be held under section 341 (a), the trustee may hold open that meeting for a reasonable period of time to allow the debtor an additional period of time to file any unfiled returns, but such additional period of time shall not extend beyond—

(A) for any return that is past due as of the date of the filing of the petition, the date that is 120 days after the date of that meeting; or

(B) for any return that is not past due as of the date of the filing of the petition, the later of—

(i) the date that is 120 days after the date of that meeting; or

(ii) the date on which the return is due under the last automatic extension of time for filing that return to which the debtor is entitled, and for which request is timely made, in accordance with applicable nonbankruptcy law. [emphasis added].

Reading both 1308(a) and (b) together, along with a few tea leaves and tarot cards thrown in for good measure, we see that the requirement of 1308(a) applies even to returns not yet due. So if you haven't filed your 2011 return, and your 341 hearing is scheduled for February 6, you'd better have your return filed by February 5!

And what if I don't file my return file prior to my 341?

If you don't, the trustee "may hold open that meeting for a reasonable period of time to allow the debtor an additional period of time to file any unfiled returns" as noted above. At the very least, that holds up confirmation of your plan. And if you have a not-so-friendly Chapter 13 trustee, she just might not hold the meeting open and instead proceed under section 1307(e), which provides:

(e) Upon the failure of the debtor to file a tax return under section 1308, on request of a party in interest or the United States trustee and after notice and a hearing, the court shall dismiss a case or convert a case under this chapter to a case under chapter 7 of this title, whichever is in the best interest of the creditors and the estate.

What this means is that, in our example, if you don't have your return filed by February 5, the U.S. Trustee or a "party in interest" (i.e., pretty much anyone including your crazy ex-wife) may file a motion, and the court "shall dismiss a case or convert a case under this chapter to a case under chapter 7."

This presents huge problems for self-employed debtors

For most W-2 employees, filing tax returns isn't that big of an undertaking, assuming they get their W-2 from their employers in a timely fashion. Still, getting the return filed by February 5, or even a few weeks later, can be difficult when the debtor may be dealing with issues in his bankruptcy case.

But for self-employed debtors, this requirement presents an impossibility. Many self-employed debtors must first file corporate or partnership returns prior to filing their own individual tax returns.

Furthermore, holding the first meeting open accomplishes nothing. Trustees have the right to demand annual tax returns under section 521 or to require the debtor to furnish the trustee the last year's return even after confirmation. After all, what's the difference between a case filed on December 31 and one filed on January 1? Why should one case be administered under the draconian requirements of 1308(a) and the other, filed a day earlier, escapes these requirements?

But the IRS needs the returns to file their claims on time!

No they don't. Governmental creditors already get 180 days to file claims because we assume the government can't possibly do anything on time. So for that January 1 bankruptcy petition, the IRS has 180 days after that to file it's claim–way beyond April 15.

Would the IRS really do this?

Yes, apparently it would. The IRS Office of General counsel in North Carolina reminded bankruptcy lawyers in the South Carolina bar of this in a letter dated August 11, 2001–which, amazingly was signed by a staff attorney in "Group 1, business/self-employed." I say, "amazingly" because the IRS attorney signing this letter should know that there's no earthly way debtors can pull partnership and corporate returns out of their ears in early February, then follow up with a quick 1040 filing.

Mom says just because you can doesn't mean you should

There is nothing in the Code requiring the IRS to hassle debtors by filing unnecessary motions like this. As mom used to say, "just because you can doesn't mean you should." Ditto for the IRS. Searching the hills of North Carolina for illegal stills would be a better use of IRS resources.

And if they persist, there's the 1040WAG

Okay, I just made that up. But here's what it is. It's a 1040 return where the debtor takes a wild-assed guess (hence the "WAG") at what he should put down, then files it. Voila, no more problems. He then amends the return at a later date (filing a 1040X–there really is such a thing) when he obtains W-2s, other records, partnership returns, corporate returns, and so on. Problem solved! This is, after all, what the government asked for.

Of course, this accomplishes nothing but allowing the debtor to assert compliance with a nonsensical rule which should not be enforced. Instead, it would be better if the IRS instead focused on its core mission–collecting taxes.

Postscript: On both a personal and professional level, I genuinely like the people I've come in contact with at the IRS on behalf of my clients. I do, however, object to the Office of Division Counsel in North Carolina threatening debtors with dismissal for failing to do something which is impossible. Chapter 13 bankruptcy is about paying creditors back, including the IRS. The IRS should work to assist debtors to accomplish this goal, rather than threatening hard-working, honest Americans in the throes of the worst economy since the Great Depression.

For one of the few decisions analyzing this issue, see In re French, Case No. 06-20066 (Bankr. E.D.W.I. 2006). In addition, United States v. Novello, Case No. 08-2362-JAR, a U.S. District Court case in Kansas , is worth reading. In Novello, the U.S. District Court reversed the Bankruptcy Court's use of section 105 (allowing the court to issue any order necessary to carry out the provisions of the Code) to deny the IRS's motion to dismiss the case. After explaining that the Bankruptcy Court improperly used section 105–albeit in a common-sense fashion–the District Court admonished the IRS by stating: "In so ruling, the Court repeats the observations of the bankruptcy court in this case as well as in McCluney, that a motion to dismiss brought under § 1307(e) is discretionary and that once a return is filed soon after the motion to dismiss, that statute's purpose has been fulfilled. The bankruptcy court was understandably frustrated by the tactics of the United States and the resulting inequity to the debtor. As the bankruptcy court noted, just because the IRS has the power to pursue such a motion does not mean it should seek to enforce it with "unwavering tenacity" under any and all circumstances.The United States has succeeded on appeal. Upon remand, however, it would behoove the United States to consider whether the gain incurred by continued pursuit of its motion to dismiss under the circumstances of this case comes at the cost of its goodwill with the bankruptcy court." Words of wisdom–sounds like something mom would say.

For more information on these matters, please call our office at 305 548 5020.