Chapter 13 Bankruptcy: Living Expenses – Need vs. Want
When people consider filing for relief under Chapter 13 of the Bankruptcy Code they are typically consumed with the debts they owe, creditor harassment, and just making it day to day. Because this can be overwhelming, seeking counsel from an attorney can help put things into perspective.
Some people do not think in terms of needs and wants when it comes to considering bankruptcy or even spending and living on a budget. However, this is a major part of what Chapter 13 bankruptcy helps to accomplish. In the bankruptcy world, a person’s expenses are looked at in two categories – necessary and non-necessary for reorganization purposes. A necessary expense would be defined as food, clothing, and shelter. Non-necessary expenses would be things such as cable, internet, gym memberships, etc. People must begin to put their expenses in perspective and make tough decisions like whether to keep their home or surrender it or whether they can afford to keep their children in a private school which clearly is a non-necessary expense.
For illustration purposes, let’s look at expenses for food, clothing and other items based on the IRS National Standards for Allowable Living Expenses in bankruptcy cases filed on or after March 15, 2009. Per month, a household of two people can spend $537.00 for food, $66.00 for housekeeping supplies, $162.00 for clothing and services, $59.00 for personal care products & services and $197.00 for miscellaneous expenses. These items become budgeted expenses in the sense that you are now limited to what you are allowed to spend on certain things. Reality sets in quickly and it sometimes stirs up anger or bitterness in Chapter 13 cases when someone must be told that they have to remove their children from private school or give up the RV used for vacation or the boat used for recreation. Remember, usually these issues only come up when someone files a Chapter 13 seeking to pay unsecured creditors less than 100%.
Anyone who files a bankruptcy is subject to these expense limits and must follow the confines of the law and the applicable rules if they want the benefits that bankruptcy offers. In other words, you have to take the good with the bad. Because we must follow the IRS expense guidelines, a person can be forced to give up property in bankruptcy and/or reduce their spending in they want the benefits of a Chapter 13 reorganization. So keep this in mind when you elect to file a Chapter 13 and attempt to pay your unsecured creditors less than 100%.
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.