Tag Archives: Chapter 7 bankruptcy

Discharging Tax Debts in Bankruptcy When the IRS Has Filed Your Returns

Tax Return 1040ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I just got a Chapter 7 bankruptcy discharge. I owed Federal income taxes for 2004, 2005, and 2006. Because I did not file the returns on time, the IRS filed them for me. I called the IRS, and they suggested I file my own returns because the returns they filed showed me owing more taxes than I really owed. I filed the late returns and the IRS accepted my figures and reduced the amount that I owed. But now the IRS is billing me, despite the Chapter 7 discharge, saying my taxes were not discharged in bankruptcy because they filed the original returns. I owe the IRS about $15,000. What can I do? 


Dear Norman,

This is very interesting. The law allows the IRS to file a tax return for you, if you do not voluntarily file your own return. Normally, this occurs in cases where your return is a few years delinquent. The IRS will prepare a return for you based on the information it has on hand, usually income advices like W-2s or 1099s. The problem is that you may have been entitled to deductions which the IRS didn’t know about.

The court decisions all say that if you file a return after the IRS has filed one for you your filing is a null, “futile act” which does not allow you to discharge the tax in bankruptcy.

Your case is interesting because you may be able to get around this rule. You might be able to discharge the taxes if you can prove that:

  • the IRS agreed to let you file the subsequent returns, and
  • it accepted the changes made on those returns in lieu of their own.

If you can prove these two things, I think you will have a fair shot at discharging your debt.

To make this argument, you’ll need to reopen your bankruptcy case and file a lawsuit against the IRS seeking a court determination on the issue. It will be hard to handle this on your own. Find a lawyer to help you.

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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State Median Income Figures Change for Bankruptcy Means Test

On April 1, 2013, the state median income figures for the bankruptcy means test were adjusted.  In most states, the new figures make it slightly more easy for people to qualify for Chapter 7 bankruptcy.

What Is the Means Test?

In order to qualify for Chapter 7 bankruptcy, your income must be below the median income for your state or, you must pass the bankruptcy “means test” (a series of calculations based on your income and certain expenses designed to determine if you could realistically fund a Chapter 13 repayment plan.)

For details on how the means test works and the role it plays in both Chapter 7 and Chapter 13 bankruptcy, visit Nolo’s Bankrutpcy Means Test area.

State Median Income Figures Adjusted April 1, 2013

On April 1, 2013, new state median income figures were released. In most states, (California being a notable exception), the state median income increased — often by a thousand dollars or so per year.  This means that you can earn slightly more money, and still qualify for Chapter 7 bankruptcy without having to take the means test.

You can find the state median income figures here:  http://www.justice.gov/ust/eo/bapcpa/20130401/bci_data/median_income_table.htm


11th Circuit Allows Mortgage Lien Stripping in Chapter 7 Cases

The 11th Circuit surprised the bankruptcy world recently when it ruled that Chapter 7 bankruptcy debtors could strip off wholly unsecured liens from their homes.  The ruling  represents a major victory for bankruptcy debtors — providing Chapter 7 debtors with a  powerful tool for debt relief.  Read on to learn what this new ruling means.

What Is Lien Stripping?

In most bankruptcy districts, lien stripping is allowed in Chapter 13 bankruptcy only. With lien stripping, if you have a second mortgage or junior lien on your home that is no longer secured by the equity in your home, you can strip it off (remove it). The stripped off lien becomes unsecured debt.

Here’s an example. Let’s say your home is currently worth $350,000. You have a first mortgage in the amount of $400,000, and a second mortgage in the amount of $50,000. The equity in your home does not cover the second mortgage (it covers $350,000 of the first mortgage). If you were to file for Chapter 13 bankruptcy, you could remove the entire second mortgage from your property.

For details on how lien stripping works, and for more examples, see the articles in Nolo’s Your Home & Mortgage in Chapter 13 Bankruptcy topic area.

The 11th Circuit Decision

In In Re McNeal, Case No. 11-11352 (11th Cir., May 11, 2012), the 11th Circuit ruled that a  debtor could strip off a home lien in Chapter 7 bankruptcy if no part of the lien is secured by the home’s equity (this is referred to as being “wholly unsecured”). It distinguished this situation from that discussed in the U.S. Supreme Court’s decision in Dewsnup v. Timm, which said you cannot strip off a partially unsecured lien in Chapter 7 bankruptcy. (For more discussion of the 11th Circuit decision as it relates to Dewsnup, see Carmen Dellutri’s post in the Bankruptcy Law Network forum.)

Good News for Bankruptcy Filers

This is good news for debtors living in the 11th Circuit’s jurisdiction. If you have a mortgage or lien on your home that is wholly unsecured (and in this day and age of plummeting real estate values, many people do), you can enjoy the many advantages of Chapter 7  bankruptcy and still be able to strip off the junior lien. Once the lien is stripped off, it will become unsecured debt and be discharged at the end of your Chapter 7 bankruptcy.

What Happens Next?

It’s almost certain that the 11th Circuit decision will be appealed to the U.S. Supreme Court. But in the meantime, Chapter 7 debtors can use this newly available tool in Chapter 7 bankruptcy.