Bankruptcy and tax debt: Can I discharge my tax debt in Bankruptcy?

Friday 5th of October 2012 01:46:25 AM

I am often asked this question by clients.  The short answer that most clients will get from their attorney is “No.”  However, this is oversimplifying it.  You CAN get a discharge of tax debt under the right circumstances.

I recently read an expertly written article on this topic.  Here is the link:

Bankruptcy: Can I discharge my tax debt if I file bankruptcy?

Thank You Attorney Coats for your very informative and well written article on the topic.

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I owe taxes. Can I discharge my tax debt in Bankruptcy?

Friday 5th of October 2012 01:45:57 AM

This question comes up often, and typically the answer is “No.”  However, there is hope.  I just read an excellent article which spells out how and when you can get a tax debt discharged.  Highly recommended reading; I simply couldn’t explain it any better, except to say that it distills down to a few points made by the author:

1. The due date for filing a tax return is at least three years ago.

2. The tax return was filed at least two years ago.

3. The tax assessment is at least 240 days old.

4. The tax return was not fraudulent.

5. The taxpayer is not guilty of tax evasion.

Here is the full article:


Bankruptcy: Can I discharge my tax debt if I file bankruptcy?

Whitney G. Coats, Esq., Dana Law Firm.


Thank You Attorney Coats for writing this informative article.  I’ll be sharing with my readers and clients.

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Cities seizing foreclosure properties to help homeowners

Friday 5th of October 2012 01:17:33 AM

The cash strapped (and now formally bankrupt) City of San Bernardino was brought to its knees by, among other things, the foreclosure crisis.  One of the hardest hit counties in the country, San Bernardino County (in which the eponymous City is located) has seen entire city blocks decimated by the real estate slump and the scourge of this foreclosure epidemic.

Some have said that there are entire streets in San Bernardino owned by the same lender.  Banks are quickly becoming the largest landlords in town.  Amongst many other problems that seem to be arising as a result (lack of maintanence, HOA dues delinquencies) is failure to pay property taxes.  Local cities and counties desperately count on property tax revenue.  With a now drastically reduced property tax revenue, the already troubled San Bernardino was forced to seek bankruptcy protection.

The City Fathers have thought of a novel approach to the problem: exercising their powers of eminent domain to seize troubled properties for the public purpose.  How does this help?  Well, lenders will now have to contend with a municipal owner and all of the complications that could arise as a result.  The lender will also have to contend with the Bankruptcy Trustee appointed to the City’s bankruptcy case.

Does this exact any sort of leverage?  Does this help homeowners?  Does this merely postpone the inevitable?  Is this even constitutional?  We’ll find out soon.

Approximately 9 months ago, clients were asking me, “How could an entire city go bankrupt?  What would happen?”  We have now seen what happens, after several California cities have already sought bankruptcy protection. Will trash continue to be collected if the City doesn’t pay its contractors?  ( a recent article suggests that it may not very soon)

Will law enforcement respond to calls?  (or will the LA County Sheriff have to bear the burden?)

Soon, we will know.  One things for certain, it’s not just the homeowners who are fed up anymore.

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Forgiven Debt, Taxable Income and Bankruptcy

Thursday 4th of October 2012 06:43:23 PM

Creditors can ‘write off’ debts; forgive them altogether.  Great, for you, right?  Well, not necessarily.

All of a sudden, you receive an IRS 1099 form, showing that your debt in the sum of (>>fill in your amount) was forgiven and can now be considered taxable income by Uncle Sam.

Such a scenario is very common in the case of junior mortgage holders who lose their lien on a property after the first mortgage holder forecloses.

However, there is still hope in bankruptcy.  Internal Revenue Code section 108 explicitly states that debts discharged in a bankruptcy case do NOT get included in income on the debtor taxpayer’s tax return.

The clincher:  Timing.  The Internal Revenue Code also states that such a discharge must take place before the event giving rise to the debt obligation.  This you would have to figure out with a tax professional, but there is hope, just make sure that you file your bankruptcy IN TIME.

There may be some exceptions carved out of the Tax Code if this scenario involves your home, but no such protections exist for other real property.

Tread carefully, take care of business in a timely fashion, and you may escape having to pay a bunch of extra tax on forgiven debt, an amount that could be sizeable if you are looking at a forgiven mortgage debt.

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