The Importance of Filing Tax Returns

Failing to file a tax return can prevent the consumer from being able to discharge the debt if they ever seek bankruptcy relief.  As a general rule, taxes that are due 3 years or less from the date the bankruptcy petition is filed are not dischargeable and will still be owed once the individual receives the discharge.  But the return has to have been filed at least 2 years before the bankruptcy case is filed.  The return can even be filed late as long as the 2 years have passed.  And that’s a good reason to file tax returns as soon as possible.  If it’s ever necessary to file bankruptcy, it will be very helpful if those returns were filed at least 2 years ago.

However, if an individual doesn’t file a tax return when it is due and the IRS sees income on a W-2 or 1099, the IRS can estimate the amount of tax they think is owed by preparing a Substitute For Return.  Once the IRS estimates the tax they think you owe on their Substitute For Return, they will send a deficiency notice.

The consumer can then file the real return and will probably owe considerably less than estimated.  But, for bankruptcy purposes, the IRS Substitute For Return does not qualify as a return for that 2-year rule.  Even worse, some bankruptcy courts have held that any return filed by a taxpayer after the IRS has prepared a Substitute For Return does not qualify as a return for bankruptcy purposes.  That means that once the IRS prepares a Substitute For Return for a specific year, it will never be discharged in bankruptcy court. For these reasons ,it is important to  file tax returns even if the consumer owes and cannot pay it.


Stopping Foreclosure by Filing Bankruptcy

If a consumer falls behind on their mortgage payments, and the lender accelerates the loan and initiates foreclosure proceedings, a Chapter 13 bankruptcy (wage earner) is often the only realistic way to save the home from a foreclosure sale.

Unless the homeowner can pay all unpaid mortgage payments, late fees, legal fees and foreclosure costs prior to the foreclosure sale, the lender will often proceed with foreclosures while offering loan modification options under HAMP or other programs, which may or may not stop the foreclosure. Many consumers rely exclusively on loan modification programs until it is too late and they are facing a foreclosure sale.

One thing that is very important to remember is that unless the lender agrees to stop the foreclosure by entering into a loan modification, the law firm conducting the foreclosure will be proceeding. This causes a great deal of confusion. It is a good idea to know about Chapter 13 bankruptcy, which can be a viable alternative for many people, even if they wish to attempt a loan modification.

Chapter 13 bankruptcy is the only way to immediately stop a foreclosure process and require the mortgage holder to accept payments on the arrearages over a period of time. In addition to saving a consumer’s home, Chapter 13 provides other benefits of discharging unsecured debts (like medical bills or credit cards), resolving tax problems, and reducing the monthly payments owed on secured debt such as car notes and furniture notes.

Be Wary of Debt Consolidation Companies

Since the economic meltdown of 2008, many consumers are so deeply in Debt that it is not possible to repay the loans without changing the payment arrangements.  A considerable number of consumers have found bankruptcy to be a viable option, especially since the stigma against bankruptcy has been fading since the 1970s.  However, some consumers are utilizing the services of Debt Consolidation Companies, which can be risky. 

Memphis TN Debt Consolidation | Law Office of John E. DunlapDebt Consolidation is defined as combining all Debt together and one payment with one interest rate either through a home equity line of credit, Chapter 13 bankruptcy (Wage Earner) or a Debt Consolidation Company.  This makes the payments easier to manage and often makes the monthly payment smaller by extending them over a longer period of time.  In a Chapter 13 bankruptcy and some Debt Consolidation Companies, the Debtor makes payments to the Chapter 13 trustee or the Consolidation Company, which then makes the payments to the consumer’s creditors. 

While Debt consolidation has a rather high success rate under Chapter 13 bankruptcy, using a Debt Consolidation Company to consolidate Debt does not provide the oversight of federal court and can be a big risk. Many of the Debt consolidation companies are for profit companies, though there are also nonprofit companies.  These companies offer loans to the consumer to cover the cost of Debt repayment, and then take of the responsibility of repaying the person’s loans.  Instead of paying each creditor separately, the consumer makes one payment to the Debt Consolidation Company.  The interest on the new loan is lower than previous Debts but since Debt Consolidation Companies make their money on interest, companies often stretch payments out over longer than necessary periods of time.  Often the total for the Debt consolidation loan is higher than the original loan. 

In addition to extending payments to cost more interest, Debt Consolidation Companies also charge consumers a monthly maintenance fee.  This can be as much as 18 percent of the consumer’s total monthly payment.  Moreover, if the payments are not made in a timely manner, the consumer’s credit report can be damaged further. 

Lastly, unlike Chapter 13 bankruptcy, creditors can refuse to work with the Debt Consolidation Company, leaving the consumer with an extra Debt payment in addition to the payments of the firm. It is also perfectly legal for a creditor to withdraw from the repayment plan at any time.  There are much better ways to consolidate Debt than employing the services of a Debt Consolidation Company.  It is not unusual for a Debtor to be in a worse financial position at the end of the consolidation.  If you are currently under financial distress, please seek the advice of a bankruptcy lawyer prior to entering into an agreement with a Debt Consolidation Company.

If you’re under financial distress from Debt, call us today for a free consultation at (901) 320-1603.