Q & A about the New Bankruptcy Law Amendments

(continued) Questions 55 - 62

55. Will revocation of the "Chapter 13 super discharge" result in more litigation?
    1. Logic says yes, because now there will be "nondischargeabilty" adversary proceedings brought even in Chapter 13, where a creditor claims a debt is a debts for fraud, conversion, embezzlement, breach of fiduciary duty, or other wilful and malicious acts , and the debtor denies this

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56. Does the New Law affect discharge of tax debt?
    1. Yes, the New Law precludes discharging certain taxes which are dischargeable under present law in Chapter 13.

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57. Please describe what kinds of taxes will NOT be able to be discharged under the New Law, that can be discharged at present, under the old law:
    1. Under existing law, a debtor in Ch 7 or 11 can seek to discharge income taxes if the tax is not secured, the tax became due more than 3 years before the bky was filed, plus the tax was assessed or assessable more than 240 days before the bky was filed, plus the tax return was filed more than 2 years before the bky was filed, AND the return had no intent to evade or defeat tax. Lots of debtors flunk the "no intent to evade or defeat tax" provision, so they presently file a Chapter 13, because fraud and other wilful and malicious acts are dischargeable in Chapter 13 at present. However, under the New Law, the superdischarge (ability to discharge) debts arising from fraud, conversion, embezzlement, and other wilful and malicious acts in Chapter 13 is eliminated. Consequently, under the New Law, debtors who committed tax evasion will NOT be able to use Chapter 13 to seek to discharge those debts, unless we get some case law holding that tax evasion is neither a fraud nor a "wilful and malicious act" and its not very likely we'll get some law saying that.
       1. In addition, there are a substantial number of debtors who have not filed tax returns for 1 or more years. Under present law, if the returns that were not filed were due more than 3 years before the bky is filed, you may be able to put those debtors in Chapter 13, and seek to discharge those debts, because the 11 USC §523(a)(1) nondischargeability does NOT apply in Chapter 13. However, under the New Law returns will be required to be filed BEFORE the bankruptcy is filed.

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58. Are there any tactics the debtor attorney can use to address taxes that can no longer be discharged in Chapter 13 under the New Law?
    1. One possibility is do an Offer in Compromise to the IRS, or a state tax agency, outside of bankruptcy. OIC uses some technical standards which can result in paying at lot less than all the tax owed, in a lump sum or over time
    2. In an OIC, will it be more beneficial under New Law, for debtor to do an OIC to pay a lump sum to pay tax, or do an OIC to pay tax in monthly installments?
       1. If your debtor is going to have enough surplus income under the New Law "means testing" that the debtor would be forced to be in Chapter 13, do a pay over time plan, because you may be able to deduct the payments to IRS or state tax agency, as "actual expenses" when doing the means testing calculation, and so get the debtor down to a surplus that will let debtor file 7 instead of 13.

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59. Does the New Law add requirements re tax returns that are detrimental to debtors?
    1. Yes, as discussed supra, New Law adds section 11 USC §521(e) and (f), which requires that in a Chapter 7 case where the debtor is an individual, and in a Chapter 13 case, that the debtor, no less than 7 days before the 341a exam, give the Trustee a copy of the debtor's federal income tax return (or a transcript of that return) for the tax year ending closest before the bankruptcy case is filed, and that the debtor provide a copy of that return to any creditor which requests copy of return, at same time debtor provides return to Trustee, and that court shall dismiss the case if debtor fails to provide creditor who requests return with copy of return "unless the debtor demonstrates that the failure to provide a copy of such tax return or such transcript is due to circumstances beyond the control of the debtor." 11 USC §521(e)(2)( C ).
       1. PRACTICE POINTER: Expect form letters from credit card companies demanding returns, just to make it more onerous for debtors, and from any ex-spouse and judgment creditors.
    2. New Law also adds 11 USC §1308, which requires that Chapter 13 debtor to file with the appropriate taxing agency all tax returns that came due during the 4 years before the bankruptcy was filed. The 4 years of returns must be filed with the appropriate taxing agencies by no later than the 341a meeting. A few extensions are possible under specific circumstances stated in §1308. Strangely, §1308 does NOT specify what happens if the returns aren't filed with the taxing agencies as specified by §1308.
    3. During the bankruptcy case, at the request of the Court, the US Trustee, or any party in interest (aka creditor) a debtor who is an individual in Chapter 7, 11 or 13 shall file with the Court a copy of each federal income tax return required under applicable law, that comes due DURING the bankruptcy case; return must be filed with Court at same time sent to taxing agency.
    4. If debtor had returns that were due within 3 years pre-petition but not filed until after the bankruptcy is filed, then the debtor, at request of the Court, US Trustee, or any party in interest must file copies of those returns with the Court.
    5. In a case under Chapter 13, the debtor must annually, each year the bankruptcy case is going on, file with the court a statement under penalty of perjury of the income and expenditures of the debtor during the tax year, annually, which must include monthly income of the debtor, and which shows how income, expenditures, and monthly income are calculated, if the Court, US Trustee, or any other party in interest (creditor) requests this. Expect that any judgment creditor, or ex spouse will request this.

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60. ETHICS: Do you as consumer debtor attorney need to warn your prospective consumer bky client about this tax return requirement before the client chooses to file bky?
    1. Yes, the client may choose not to file bky, if return might be subject to being attacked as not accurate, or if they have an ex-spouse, or judgment creditor they don't want to give return to.
    2. As consumer debtor attorney, what do you need to get?
       • (1) Need to get copy of the return from your client, before let client file bky, so you can make sure the income reported on return is consistent with the income reported in schedules I, J, statement of financial affairs
    3. Debtor has to give copy of tax return to every creditor who requests it

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61. EHTICS: Should you tell the debtor, before the case is filed, about the additional types of documents (e.g. pay stubs) the debtor will be required to file if the debtor chooses to file bankruptcy. Yes, and get copies of those before you file the case, so you can make sure what the debtor says in the bankruptcy schedules is consistent with those documents.

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62. ETHICS: If it turns out that the consumer debtor's schedules or petition or statement of financial affairs is NOT accurate, contrast who can be held liable under existing law, and who can be held liable under New Law?
    1. Under existing law :
       1. debtor is liable, if knowingly or recklessly makes material misstatement or material omission. In Chapter 7, only an individual can receive a discharge, and an individual in Chapter 7 can be denied any discharge if the individual has made a "false oath" during bky, 11 USC §727(a)(4).
       2. In Chapter s 11 and 13, case can be dismissed for bad faith if debtor knowingly lied, because debtor being in "good faith" is a requirement in Ch 11 and 13. Debtors and debtors' attorneys who file bankruptcy in "bad faith" can be held liable to pay damages to other parties in interest, per FRBP Rule 9011, but dismissals for bad faith filings are rare, unless the debtor doesn't exist, there have been serial cases, and/or there have been fractionalized transfers of property from one debtor to another.
       3. Under existing law, debtors and debtors attorneys are RARELY found liable for Rule 9011 violations. Under existing law, its very hard to get bankruptcy judges to award Rule 9011 sanctions, even where those sanctions clearly should be awarded.
    2. ETHICS: Under New Law:
       1. Debtor is still liable, and can be denied discharge under Ch 7 for false oath.
       2. Cases can still be dismissed if brought in bad faith, and both debtor and debtor's counsel can be held liable, per Rule 9011, they they file a bankruptcy in "bad faith'.
       3. In addition, per New Law, the attorney may be held personally liable to pay the Chapter 7 Trustee's attorneys fees and costs if the attorney files a Chapter 7 case for the debtor, and loses a 707(b) "abuse of Chapter 7 motion", and the Court finds the attorney violated Rule 9011. [11 USC 707(b)(4)(A)];
       4. In addition, whenever the Court finds that a debtor's attorney violated Rule 9011, the Court may order the debtor's attorney to pay "an appropriate civil penalty" to the Trustee or US Trustee, per 707(b)(4)(B)(I). This subsection is NOT tied to Rule 707(b) motions, it would apparently apply to any conduct that violated Rule 9011:
          • "(B) If the court finds that the attorney for the debtor violated rule 9011of the Federal rules of bankruptcy Procedure, the court, on its own initiative or on the motion of a party in interest, in accordance with such procedures, may order-(I) the assessment of an appropriate civil penalty against the attorney for the debtor and (ii ) the payment of such civil penalty to the trustee, the US trustee (or bankruptcy administrator, if any)."
       • Unclear why this is needed, because Rule 9011 specifies any attorney for any party can be ordered to pay damages for conduct violating Rule 9011. Apparently Congress never heard of abusive tactics by creditors' attorneys or trustees.
       5. In addition, the signature of the debtors attorney on the petition documents, pleadings, motions, constitutes a certification by the attorney that the attorney has performed a reasonable investigation, and that the pleading is well grounded in fact and warranted by existing law or good faith argument for extension thereof, per 707(b)(4)( C ). Again, unclear what this adds that wasn't already in FRBP Rule 9011.
          • (1) Practice Pointer: If you are a debtor's attorney, make sure you have done reasonable investigation before signing the petition documents, so that, in case they turn out to be inaccurate, you can argue you should not be sanctioned.
       6. In addition, the signature of an attorney on the petition constitutes a certification that the attorney "has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect".
          • (1) Obviously you deserve to be sanctioned if you file a petition knowing the data is incorrect.

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