The majority of bankruptcy filers can use the laws to protect their assets from the Court and from the IRS and other creditors. But before we talk about protecting assets, let’s review the laws about eliminating IRS income tax debt through a bankruptcy filing. Here are the requirements (1) the taxes have to be at least 3 full years old, (2) you have to have actually filed your tax returns with the IRS on a fairly timely basis for those tax years, and (3) the IRS must have “assessed” the tax liabilities at least 240 days prior to your bankruptcy case being filed. A tax assessment means that the taxes were placed “on the IRS books”, in other words, the IRS agreed with the amounts owed.
So You’re a Good Candidate for Bankruptcy, What Happens Next?
A good bankruptcy lawyer should be able to quickly discern if a prospective client is a good candidate for a bankruptcy filing. What are some of the red flags? Well, if you have transferred property within the past 4 years (given away or sold it without getting fair market value), then the Bankruptcy Trustee and Judge will wonder if you made those transfers in bad faith. If you have borrowed substantial money from family members, friends or business associates, and repaid the loans, then those repayments could be deemed as “preferential payments”, meaning the Court will want the family members or friends to pay back those loan payments.
If you have engaged in substantial borrowing close to the time of filing the bankruptcy case, then that too might be viewed as being in bad faith. Waiting to file your case might be a wise move.
Moreover, can you protect all of your assets? That question is governed by a set of bankruptcy laws known as “exemptions”. Basically, exemptions are the laws that the Bankruptcy Court provides filers to protect assets such as home equity, personal belongings, vehicles, bank accounts, retirement plans, and so on.
The vast majority (roughly 98%) of bankruptcy filers (especially for Chapter 7 cases) will protect all of their assets.
How does a Bankruptcy Filing Affect Your Credit Rating?
Well, one big myth about bankruptcy is that it will “ruin your credit for 10 years”. In short, that thinking is wrong and is not based upon actual cases. A few quick client stories:
Jane had filed a Chapter 7 case after going through a divorce. She got rid of $33,000 of credit card debts. Her case took 4 months from start to finish. Three years and three months later, she purchased a new home for herself and her children and qualified for a 3.75 per cent mortgage (which at the time was a very competitive rate).
Joe had filed a Chapter 13 case in 2010 and eliminated approximately $30,000 in IRS tax debt as well as eliminating a judgment and $10,000 in credit card debts. His Chapter 13 case was over in 2015 after 5 years of payments (there was tax debt that he was required to repay during his case). In mid-2017, he purchased a new home with a 4.25 per cent mortgage rate, again a competitive rate.
I can provide more case studies, but suffice it to say, that folks do recover quickly after a bankruptcy filing.
If you have comments or questions, please let me know below.