Tag Archives: discharge

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? 

Norman

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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Do I Have to Report the Amount of Debt Discharged in Bankruptcy on My Tax Return?

Tax Return 1040ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions. 

Hi Leon,

I filed Chapter 7 bankruptcy earlier this year and got a discharge. Our bookkeeper says he needs to know the total amounts discharged for our 2013 tax return. My lawyer says he doesn’t know and I’ll have to pay more fees if I want him to try and find out. I didn’t see it on the discharge notice from the courts. I am going crazy trying to find the number.

Roger

Dear Roger,

You’re an early bird. This is a question I normally don’t see until tax season. I am sorry this is driving you crazy.

First, I’ll explain for you (and your lawyer) why you won’t find anything that lists the amount of money you discharged. Next, I’ll explain for you (and your lawyer and bookkeeper) why you don’t need to know the discharge amount for tax purposes.

Bankruptcy Doesn’t Discharge Specific Dollar Amounts

The bankruptcy court didn’t make a determination on the amount of any particular debt that you discharged. That’s why you can’t find the number anywhere. There are a number of reasons why bankruptcy law works this way.

There’s no point in figuring out exact amounts. Suppose you had an ongoing dispute over an amount that you owe to a bank – you say it’s $100 and the bank says it’s $150. If the debt is dischargeable, it doesn’t matter who is right. You don’t have to pay it, so why should the court figure out the exact amount?

Determining exact dollar figures would be costly and time-consuming. If the discharge did apply only to a specific dollar amount, then the court would have to determine that amount. This would require a court trial or some other time-consuming procedure to determine how much you owe for every debt that you have.

The amount you owe changes constantly due to interest. Most of the debts you discharged probably accrued interest during your bankruptcy case. Because of interest piling up every day, the amount you owe constantly changes. This means that even if there was no dispute over the amount you owed, you could almost never list the correct amount on your bankruptcy papers.

It’s much easier if the bankruptcy discharge simply eliminates an entire debt. So that is what the law does.

You Don’t Need Discharge Amounts for Your Tax Return

Luckily, you don’t need to know the amount of your discharged debt for tax reporting purposes. The amount of debt you have discharged in bankruptcy does not get taxed nor is it reportable as income. The figure does not go on your 1040 tax form. In fact, even if you wanted to put it on your form, there’s no place for it.

You can stop going crazy.

— Leon

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.

Find Leon on Google+

Can I Reopen My Bankruptcy Case to Discharge a Student Loan?

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Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I filed a bankruptcy seven or eight years ago. I asked my lawyer to include my student loan in the bankruptcy. However, my lawyer wouldn’t even try to see if we could get it discharged in the bankruptcy. Is it too late to try now? 

You can imagine my frustration that I’ve been paying on this loan and will be continuing to pay on this loan until 2023. 

Thanks, 

Sarah

Dear Sarah,

Student loans are usually not dischargeable in bankruptcy. However, there are limited circumstances where student loans may be discharged. If you think you qualify for a discharge, you can reopen your bankruptcy case to litigate the issue.

The Undue Hardship Standard

To seek a bankruptcy discharge of a student loan, the borrower must file a lawsuit in bankruptcy court against the lender. The borrower must prove in trial that repayment will impose an undue hardship on the debtor or any dependent of the debtor. These can be hard cases for a borrower to win.

In California, bankruptcy courts require a finding that the debtor has proven each of the following three elements of undue hardship:

  • the debtor cannot maintain, based upon current income and expenses, a “minimal” standard of living for himself or herself and his dependents if compelled to repay the student loans
  • additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans, and
  • the debtor has made good faith efforts to repay the student loans.

Most borrowers who succeed in discharging student loans are able to do so because they have a severe total permanent disability, either physical or mental. Most of the cases I have handled involved a mental disability, such as permanent disabling depression and anxiety disorders.

(To learn more, see Nolo’s article Student Loan Debt in Bankruptcy.)

Getting Help From an Attorney

The process of such court litigation is extremely difficult. Most debtors will not have the skills to do this on their own. It can also be very expensive if done through an attorney.

Unfortunately, those people who might qualify for the undue hardship discharge are unlikely to have the money to pay a lawyer. If such a borrower can afford a lawyer, that very fact may negate the claim that it will impose an undue hardship. In most cases that I’ve handled, the attorney fees were paid by a family member who wanted to help.

Reopening Your Bankruptcy Case

It is possible to reopen your bankruptcy case for the purpose of seeking a hardship discharge of your student loan. If you feel that you may qualify for a hardship discharge, consult a lawyer with experience.

Other Ways to Get Relief From Student Loans

Lastly, I want to point out that borrowers who have a total permanent disability may qualify to receive forgiveness of student loans that are guaranteed by or partly funded by a government entity or a nonprofit institution. If so, this can be done without a bankruptcy. Such lenders have established a comparatively easy procedure to apply for such forgiveness. Details can be obtained directly from your lender.

Even if you don’t have a permanent disability, there are many government repayment programs that can help you lower payments or get a forbearance. To learn more, check out Nolo’s Student Loan area.

-Leon

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. 

Find Leon on Google+