How Often Can I File Bankruptcy?
The federal bankruptcy laws do not limit the number of times an individual can file for bankruptcy protection. When an individual is facing overwhelming debt and needs relief from creditors, the bankruptcy laws provide powerful protection. In some cases that protection can be a discharge of debt. In other cases, it means an opportunity to repay what is owed.
An individual may file multiple bankruptcies for many reasons. When a discharge of debt is needed, the federal law limits time between discharges. After you receive a discharge in a previous Chapter 7 bankruptcy case, you must wait 8 years before you can receive another Chapter 7 discharge; and 6 years to receive a Chapter 13 discharge. If you received a discharge in a previous Chapter 13 bankruptcy case, you must wait 4 years before you can receive a Chapter 7 discharge; and 2 years to receive another Chapter 13 discharge.
The above time periods are measured from the date the previous case was filed. For instance, if you filed a Chapter 7 bankruptcy on June 1, 2005, then on June 1, 2013 you will be eligible to file a Chapter 7 bankruptcy case and receive a discharge. However, on June 1, 2011 you are eligible to file a Chapter 13 bankruptcy and receive a discharge.
In some cases a discharge is not needed. A debtor can file a Chapter 13 bankruptcy and repay debts without receiving a discharge. In this situation there is no legal limitation between bankruptcy cases. This strategy is especially useful when faced with non-dischargeable debts that must be fully paid. The obligation is paid over time under the supervision and protection of the bankruptcy court. In some rare cases of abuse a bankruptcy court will deny the debtor relief. This may occur when a debtor has shown a history of repeated bankruptcy filings that have been dismissed.
If you have received a discharge and need the protection of the bankruptcy laws for a second time, discuss your situation with an experienced bankruptcy attorney. The bankruptcy laws are meant to help the honest, but unfortunate debtor and can help you straighten out a difficult financial dilemma.
Chapter 7 Credit Card Debt
The Bankruptcy Code forgives many honest financial mistakes. However, it also provides creditor remedies for debts that may be less than honest. The Bankruptcy Code allows a creditor to object to the discharge of a credit card debt when there is evidence that the debtor has committed fraud.
A bank objecting to the discharge of a credit card debt on the basis of fraud will file an adversary case against the debtor. The fraud claim is usually one of two types: (1) fraud in obtaining the credit; or (2) fraud in incurring the credit.
A bank may claim that the debtor committed fraud in obtaining the credit card. If the creditor can prove that the card was obtained under false pretenses (i.e. that the application was false), the credit card debt may be declared non-dischargeable because of the fraud. False pretenses may include many things, but is usually lying about financial stability or income.
The bank may claim that a charge was made when the debtor was unable to repay, and had no intention to repay the debt. Because proving this may be difficult for the creditor, the bankruptcy law presumes that a charge is fraudulent if luxury goods are purchased, or a cash advance is taken, shortly before the bankruptcy case is filed. It is then up to the debtor to prove that the charge is not fraudulent or the charge is not included in the bankruptcy discharge.
Banks routinely check the bankruptcy debtor’s account for signs of fraud. Some red flag actions include:
- Filing bankruptcy on a new card;
- Taking a cash advance prior to filing;
- Charges for travel or vacation;
- A debt transfer from one card to another;
- Credit charges while unemployed; and
- Charges made after consulting a bankruptcy attorney.
The more time between the credit card activity and the bankruptcy filing, the less likely the charge will cause a discharge dispute. The best advice is: if you are considering bankruptcy, stop using your credit cards. Consult with your bankruptcy attorney regarding the best way to discharge your credit card debt.
How Chapter 7 Affects Sole Proprietors
Most businesses are legal entities separate from the individual owners. Microsoft, for instance, is not the same as Bill Gates. Corporations, LLCs and the like are recognized as operating independent from the business’s owners. When an incorporated business files bankruptcy, the owners are not in bankruptcy, and vice-versa.
On the other hand, when the business is a sole proprietor, the owner is the same as the business. The business is not a legal entity that is separate from the individual. In fact, the business is not recognized as existing apart from its owner. The business income, expenses, property, and debts all belong to the owner. Therefore, when a sole proprietor files bankruptcy, the business is also bankrupt.
The Chapter 7 trustee who administers your bankruptcy case is under a mandate to seize control and cease operations of your business. The main reason for this is that the business assets are considered personal assets and part of the bankruptcy estate. Fortunately, in most cases personal exemptions are able to protect tools and equipment used in the sole proprietor’s business.
Accounts receivable are also part of the bankruptcy estate, so it is important to provide accurate business records to assist your attorney before your bankruptcy is filed. The trustee will want to see all gross income received by the business, and all business expenses. Since this gross income is included in your personal gross income, business income can sometimes push the total family income over the qualifying ceiling for Chapter 7 bankruptcy. Additionally, business debt is considered personal debt, so it is generally included in the bankruptcy discharge.
Every sole proprietor bankruptcy case is different. For instance, in a case where the debtor runs a day care from her home, there may be little or no business inventory or assets. In bankruptcy terms, there are no business assets for the debtor’s estate. However, where the sole proprietor runs a restaurant, there may be significant assets for the bankruptcy estate. It is important for you to speak candidly with your attorney and discuss your sole proprietor business thoroughly. Your attorney can effectively advise you on the best future action including whether it is permissible to continue business operations, whether you should form a corporation or LLC, or taking some other action to best protect your interests. If you are dealing with a personal financial difficulty, speak with an experienced bankruptcy attorney before making any decisions regarding your sole proprietor business.
Will I Lose My Tax Refund by Filing Chapter 7 Bankruptcy?
April 15 is quickly approaching and many Americans are filing their income tax returns. A common question at this time of year is, “Will I lose my income tax refund if I file Chapter 7 bankruptcy?” The short answer is no, at least if you consult with an experienced bankruptcy attorney.
The safest situation is to file your tax return and receive your refund prior to filing bankruptcy. The bankruptcy estate is calculated as of the date that you file your case. If the tax refund money is gone on the date you file your bankruptcy, there is generally no way for the bankruptcy trustee to make a claim against the tax money.
However (it’s funny how bankruptcy law, like life, has many “howevers”), there are exceptions to the general rule. For instance, if you pay an insider creditor on an antecedent debt, the trustee can avoid the transfer. An “insider” is a basically person close to you like a friend, family member, or business associate. If you owe an insider money, and you repay the debt from your tax refund, then the trustee could ask the insider to repay the money to the bankruptcy estate. Paying an insider within a year of filing bankruptcy usually leads to problems.
You may run into a similar problem if you pay down a loan, or pay any creditor a large lump sum within 90 days of filing bankruptcy. You could also run into an equity issue by paying off a vehicle with a large tax refund. These may seem like responsible actions, but the bankruptcy laws are full of landmines. Before spending your tax money it is wise to consult with your bankruptcy attorney to avoid these sticky situations.
Another issue that occasionally happens is when a bankruptcy debtor files a Chapter 7 case after filing a tax return, but before receiving an expected small refund. “No problem,” says the bankruptcy attorney, until the IRS adjusts the small refund into a large refund. There is “no problem” if the debtor has available exemptions to protect the refund, the debtor simply amends his schedules. But sometimes there is no way to protect all of the refund and the trustee is able to collect. That is an unfortunate situation for someone that really could use the extra money, and a case that can be avoided by waiting until the refund is received and spent.
If you are concerned about keeping your income tax refund, consult with an experienced bankruptcy attorney. Your attorney can advise you on property that is exempt (protected) and non-exempt (not protected) before you file your case and risk losing any property.
Question: If a foreclosure action has already been filed in state court, can you still file a bankruptcy in order to save your home?
Yes. The filing of a Chapter 13 bankruptcy can stop the foreclosure action even if a judgment has already been entered against you and the sale of your home has been scheduled so long as the Master Commissioner has NOT actually sold your home. As soon as the bankruptcy case is filed, your bankruptcy attorney will contact the attorney for the mortgage company as well as the Master Commissioner in order to notify them of the filing and at that point no further action can be taken by the mortgage company to sell your home.
Your Chapter 13 plan filed with the bankruptcy court will propose to pay the mortgage company a certain amount of money each month to catch up on your past due payments. These payments are sent to your court appointed trustee who forwards them on to your mortgage company.
Of course, you must also be able to begin making your normal monthly mortgage payment in addition to a payment to the bankruptcy trustee. The advantage of filing a Chapter 13 is that you are given five years to catch up your past due payments at zero percent interest. On the other hand, mortgage companies usually require the past due amount paid in a lump sum payment in order to stop the foreclosure unless you are able to complete a loan modification.
If you do not have the ability to save your home from foreclosure, you may need to consider a Chapter 7 bankruptcy to protect you from garnishment if the mortgage company ends up with a deficiency judgment against you. This would occur if your house sells for less than what you owed on it.
Q&A: Small Business and Tax Liability
I am a small business owner who is thinking about closing down my business but my company still owes the IRS and the State of Kentucky for some unpaid payroll taxes and sales taxes. As the owner of the corporation, will I be responsible for paying these taxes if the business stops operating? If so, can I get rid of this tax liability by filing a Chapter 7 Bankruptcy?
It depends. If you were an active member of the corporation and involved in the day to day operations including the paying of bills, then you probably will be deemed to be a “responsible party” by the IRS. For the Kentucky withholding tax obligations, you may be deemed personally “responsible” simply by being an officer of the orporation even if you were not an active party in the bookkeeping operations of the business.
As a responsible party, you may be personally liable for any unpaid trust fund obligations of the corporation. What is a trust fund obligation? It is that portion of the tax liability that was withheld from an employee’s paycheck and not turned over to the government. The matching FICA obligation of the company is not a trust fund obligation and will be deemed uncollectible by the IRS if the company goes out of business. Also, all sales taxes collected from a customer are deemed to be trust fund taxes.
If your business does have to close down, then you may need to file an individual Chapter 7 bankruptcy in order to get relief from any personal guarantees that you may have obligated yourself to in order to get the business up and running. However, you cannot discharge in bankruptcy any trust fund tax obligations that you may have. You will have to work out a payment plan after the bankruptcy is over with the IRS and the state or you may consider filing a Chapter 13 in order to pay back the tax liabilities over five years without the accrual of interest or penalties.
Question: What is the difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy?
When you elect to file for Chapter 7 Relief, you seek to have most if not all of your debts eliminated or discharged. However, in order to receive the discharge, you must be prepared to allow a bankruptcy trustee the right to sell any of your non exempt property for the purpose of turning over the sales proceeds to your creditors. Your bankruptcy attorney will be able to determine and advise you as to whether your assets are exempt and protected from sale by your trustee.
If you don’t want to lose your nonexempt property, you may want to consider filing a Chapter 13 which is a repayment plan that proposes to pay back some, but not necessarily all of your debt including your credit cards and medical bills. The amount you have to pay back depends on the amount and type of debt that you have, how much property you have, and how much money you make.
If you are looking for a way to save your home from foreclosure, then filing a Chapter 13 Bankruptcy may be the solution. You can immediately stop the foreclosure process by filing a Chapter 13 Plan that allows you to cure your home mortgage arrearages over five years.