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Dom filed a petition in bankruptcy for Chapter 7

Customer Question

     Dom filed a petition in bankruptcy for Chapter 7 liquidation based on his inability to pay the following debts: (a) federal income taxes for each of the past five years; (b) bank loans to pay those taxes; (c) a $50,000 Visa bill Dom ran up on a wildly extravagant (to put it mildly) three-week trip to Europe he completed less than two weeks before filing for bankruptcy. Which, if any, of the above debts can be discharged? Explain your answer.
Submitted: 6 years ago.
Category: Legal
Expert:  JoeLawyer replied 6 years ago.

Hi Billy:

(a) Federal income taxes are not discharged pursuant to 11 USC 523(a)(1) (see here) if those debts are of the kind specified in section 507 (a)(3) or 507 (a)(8) of the Bankruptcy Code (which basically means an income tax that was due less than three years before the bankruptcy petition was filed or that was assessed less than 240 days before the bankruptcy petition was filed) or if the tax return was not filed or was filed late and less than 2 years before the bankruptcy petition was filed, or was filed fraudulently (i.e. in an attempt to defeat having to pay the tax).

So, if Dom filed his taxes on time for the past five years (2003, 2004, 2005, 2006, and 2007) on time and accurately (i.e. not fraudulently), then he should be able to discharge liability from the years 2003 and 2004. The 2005, 2006, and 2007 returns are too recent to dscharge. The 2005 tax return was due April 15, 2006, which is less than 3 years from the bankruptcy filing date of 4/30/08, so 2005 and more recent taxes are non-dischargeable.

2003 and 2004 could be non-dischargeable if Dom requested extentions for long enough to put them within 3 years of the bankruptcy filing date, or if the returns were not filed at all, or if the returns were filed fraudulently.

I will get to your other questions but I will go ahead and post this above answer since I know you are waiting...

LEGAL NOTICE: I am only licensed to practice law in certain state(s) and I cannot give legal advice to someone who does not reside in a state in which I am licensed, nor shall anything I say in the above answer or elsewhere on this site be deemed legal advice, even to someone who resides in a state in which I am licensed. Fees I receive for answering questions are paid for information, not for legal advice. This forum is designed to provide general information only, and information herein is not warranted to be correct or applicable in any way since laws may have been misinterpreted herein, since laws change from time to time, and since the impact of those laws on any particular situation varies. The information presented in this site shall not be construed to be formal legal advice nor the formation of an attorney-client relationship. Persons accessing this response are encouraged to seek independent legal counsel in their jurisdiction for guidance regarding their individual circumstances. Do not take any action or inaction based on information presented herein since it is informational and may not be accurate or applicable to you; it merely attempts to give you a basis of knowledge to help you formulate questions to ask a legal or other professional in a face-to-face meeting in your jurisdiction. Joseph Ross does not hold himself out to be a specialist or expert in any area, regardless of assertions made by any third party, and any implication of being an expert or specialist herein is made in error. I hope the information presented above is useful to you. Answer above is (c) Joseph Ross. All rights reserved.

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Expert:  JoeLawyer replied 6 years ago.

Thanks for the Accept. You do not need to individually accept any of the rest of my responses, one Accept is sufficient...

I'm working on (b) now...

Expert:  JoeLawyer replied 6 years ago.

Next, (b) bank loans to pay those taxes.

I know that the lender who loaned the money to pay taxes stands in the shoes of the tax authority and therefore the loan is non-dischargeable to the extent the taxes would have been non-dischargeable had the loan never been made. In other words, a loan to pay all the taxes would be dischargeable to the extent the loan was used to pay the 2003 and 2004 taxes, but would be non-dischargeable for the amount used to pay the 2005, 2006 and 2007 taxes.

I am trying to remember what code section protects lenders regarding taxes... I will find it be patient ;)

LEGAL NOTICE: I am only licensed to practice law in certain state(s) and I cannot give legal advice to someone who does not reside in a state in which I am licensed, nor shall anything I say in the above answer or elsewhere on this site be deemed legal advice, even to someone who resides in a state in which I am licensed. Fees I receive for answering questions are paid for information, not for legal advice. This forum is designed to provide general information only, and information herein is not warranted to be correct or applicable in any way since laws may have been misinterpreted herein, since laws change from time to time, and since the impact of those laws on any particular situation varies. The information presented in this site shall not be construed to be formal legal advice nor the formation of an attorney-client relationship. Persons accessing this response are encouraged to seek independent legal counsel in their jurisdiction for guidance regarding their individual circumstances. Do not take any action or inaction based on information presented herein since it is informational and may not be accurate or applicable to you; it merely attempts to give you a basis of knowledge to help you formulate questions to ask a legal or other professional in a face-to-face meeting in your jurisdiction. Joseph Ross does not hold himself out to be a specialist or expert in any area, regardless of assertions made by any third party, and any implication of being an expert or specialist herein is made in error. I hope the information presented above is useful to you. Answer above is (c) Joseph Ross. All rights reserved.

Expert:  JoeLawyer replied 6 years ago.

I'll move on to (c) for now...

(c) a $50,000 Visa bill Dom ran up on a wildly extravagant (to put it mildly) three-week trip to Europe he completed less than two weeks before filing for bankruptcy

This is not likely dischargeable if the creditor timely files an objection to discharge or an adversary proceeding, but will be discharged if the creditor fails to act. I believe the Bankruptcy Rules require the creditor to file an adversary proceeding challenging the dischargeability of the debt, though I have seen a couple of creditors try to do it with an objection though I think the objection approach is procedurally flawed.

In any case, 11 U.S.C. 523(a)(2)(C) (see here) provides that charges, to the extent obtained by fraud or false pretenses (i.e. intending to never pay them back), for consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the bankruptcy petition is filed are presumed to be nondischargeable; and cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable.

"Luxury goods or services" does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor according to 11 U.S.C. 523(a)(2)(C)(i)(II).

So, Dom ran up more than $500 in charges within 90 days before his bankruptcy was filed, and these charges do not appear to be for the support or maintenance of him or a dependent, but were clearly luxury expenditures, so the presumption is that these debts are non-dischargeable. If the creditor files an objection to discharge or adversary proceeding challenging the dischargeability of the charges, Dom will likely be unable to overcome the presumption and will have to pay the creditor back. If the creditor fails to timely file an objection or ad pro before Dom's discharge is granted, the debt is discharged and the creditor blew their chance to get paid.

 

LEGAL NOTICE: I am only licensed to practice law in certain state(s) and I cannot give legal advice to someone who does not reside in a state in which I am licensed, nor shall anything I say in the above answer or elsewhere on this site be deemed legal advice, even to someone who resides in a state in which I am licensed. Fees I receive for answering questions are paid for information, not for legal advice. This forum is designed to provide general information only, and information herein is not warranted to be correct or applicable in any way since laws may have been misinterpreted herein, since laws change from time to time, and since the impact of those laws on any particular situation varies. The information presented in this site shall not be construed to be formal legal advice nor the formation of an attorney-client relationship. Persons accessing this response are encouraged to seek independent legal counsel in their jurisdiction for guidance regarding their individual circumstances. Do not take any action or inaction based on information presented herein since it is informational and may not be accurate or applicable to you; it merely attempts to give you a basis of knowledge to help you formulate questions to ask a legal or other professional in a face-to-face meeting in your jurisdiction. Joseph Ross does not hold himself out to be a specialist or expert in any area, regardless of assertions made by any third party, and any implication of being an expert or specialist herein is made in error. I hope the information presented above is useful to you. Answer above is (c) Joseph Ross. All rights reserved.

Expert:  JoeLawyer replied 6 years ago.
Still trying to find the Code Section supporting the answer to (b), I use it so seldom I never can find it. Hang on still looking...

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