Recent Entries

Collecting Unpaid Taxes from a Bankrupt Taxpayer: Is There Still Hope?

Published on September 30, 2011 in Bankruptcy Filings. 0 Comments

By Amanda Rasbach Yurechko

As a creditor, when you hear that your debtor has filed for bankruptcy protection, the tendency is to expect that the debt owed to you will not be repaid.  However, for our municipal and state clients, special rules apply that may warrant a closer look to determine whether the tax can still be collected.  In today’s economic climate, every dollar of revenue for a political subdivision will help save jobs and programs for its residents. 

As of the first quarter of 2011 state’s revenues remained at roughly 9% below pre-recession levels.[1]  States and municipalities are addressing very large budget shortfalls.  Forty-two states and the District of Columbia are projecting a combined shortfall for the 2012 fiscal year of over $103 billion dollars.  Temporary aid to states as a result of the 2009 federal Recovery Act will largely be gone by the end of the 2011 fiscal year, and states and municipalities are facing deficits that threaten jobs and programs provided.  The National League of Cities annual survey in October of 2010 found that almost 9 in 10 cities were feeling the economic crunch.[2]

States and municipalities need to look to every source of revenue possible, including taking a second look at bankrupt tax payers to determine if the tax may still be collected.  First, certain taxes are not dischargeable by way of a Chapter 7 or Chapter 13 bankruptcy including:
• Taxes for which a return was not filed;
• Taxes for which a return was filed late and filed less than two years before the bankruptcy filing;
• Taxes relating to a fraudulent return or relating to the debtor willfully attempting to evade or defeat the taxes; and
• Withholding taxes for which the debtor is personally liable.

In a Chapter 7 bankruptcy, the following are also non-dischargeable:
• Income tax due for the tax year ending on or before the bankruptcy filing date, where return was due within 3 years of the bankruptcy filing date;
• Income tax for the tax year ending on or before the bankruptcy filing date, where the tax was assessed within 240 days before the bankruptcy filing date;
• Income tax not assessed before, but assessable after the bankruptcy filing date;
• Property tax incurred before the bankruptcy filing date that was last payable without penalty less than one year before the date of the bankruptcy filing;
• Employment taxes earned from the debtor prior to the bankruptcy filing date for which a return was last due less than three years before the bankruptcy filing date;
• Excise taxes where a transaction occurred prior to the bankruptcy filing date for which a return was last due less than three years before the bankruptcy filing date, or if a return was not required, where the transaction occurred in the three years proceeding the bankruptcy; and
• Certain customs duties.

While pre-petition and post-petition interest on a non-dischargeable tax is also non-dischargeable, penalties must provide for an actual pecuniary loss in order to be considered non-dischargeable when assessed on an otherwise non-dischargeable tax.

States and municipalities should also look at filing liens on property timely.  Tax liens placed prior to a bankruptcy are considered a valid lien against the property that survives the bankruptcy, provided that they attach to actual equity in the property.[3]  Liens for property taxes attach automatically to property on January 1 of each year, but are property specific.  Liens may be placed by a municipality on specific property for costs expended by a municipality to remove or repair or secure an unsafe, abandoned or open property, to abate a nuisance or to make emergency repairs to hazardous conditions on that property. When this cost is certified by the legislative authority for the municipality, and provided to the county auditor with the description of the property affected, the lien is recorded in the tax duplicates.  Finally, liens for unpaid income tax and other taxes may be filed once judgment is rendered for that tax amount.  Unlike the above taxes, a judgment lien is valid against all property held by the debtor in the specific county in which the lien is filed, not just the particular affected property.  Where these liens attached to equity in property prior to the bankruptcy filing, and survived the bankruptcy, the debtor may be required to pay the lien when transferring the property, and the lien must be considered in any foreclosure proceeding.

The WWR Governmental Collections Practice Group and WWR’s Bankruptcy Practice Group can help you determine whether a certain taxpayer’s taxes are dischargeable in bankruptcy and whether any further action is needed. 

Amanda Rasbach Yurechko is an associate in Consumer & Commercial Collections, focusing on the Governmental Collections Group with Weltman, Weinberg & Reis Co., LPA. She is based in the Cleveland office. Amanda can be reached at 216.685.1060 and .
Footnotes:

[1]Elizabeth McNichol, Phil Oliff and Nicholas Johnson. “ States Continue to Feel Recession’s Impact.” Center for Budgeting and Policy Priorities.  June 17, 2011.  www.cbpp.org
[2]Jennifer Popovec. “Hungry for Tax Revenue, Municipalities Serve Up Tax Incentives to Lure Retailers and Developers.” May 2, 2011. www.retailtrafficmag.com
[3]Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150 (1991).

Rules Regarding Reopening Cases

Published on July 25, 2011 in Bankruptcy Filings and Motion. 0 Comments

Northern District of Ohio Bankruptcy Court Clarifies Rules Regarding Reopening Cases to File Reaffirmation Agreements and Motions to Avoid Liens

Under certain circumstances the Bankruptcy Code provides that a case may be reopened to administer assets, accord relief to the debtor or for other cause.  There are two situations that may arise in which a debtor may need to reopen a closed case.  The first situation is to file a reaffirmation agreement and the second is to avoid a judgment lien.  The Northern District Ohio under Judge Pat Morgenstern-Clarren has indicated that a case will not be reopened to allow the parties to file a reaffirmation agreement that was made after the discharge was entered.  Under the second situation, Judge Morgenstern-Clarren will allow the case to be reopened if there is a very short gap between the case closing and the motion to reopen, and the motion provides a satisfactory explanation for why the lien was not avoided while the case was open.

With regard to the courts procedure on reaffirmation agreements from a creditor’s perspective, the court provided some clarification.  Creditors should make certain to have the reaffirmation agreement signed and filed prior to discharge or the case being closed.  If a delay is expected, a motion to delay discharge should be filed in order to provide more time to obtain the reaffirmation.  From a creditor’s perspective, the courts procedure on motions to avoid is favorable as the court will not simply allow the reopening of the case in every situation and strictly scrutinize any motion filed.

David H. Yunghans practices in Bankruptcy with a focus on the Consumer Bankruptcy Group, and he is based in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. David can be reached at 513.723.2211 or .

Mortgage Modifications Drop in February

Published on April 11, 2011 in Bankruptcy Filings. 0 Comments

A recent report indicated that the number of Mortgage Modifications dropped in February by 14% from the number completed in January. The number of modifications, whether under HAMP or through the Lenders themselves, dropped below 100,000 a month for the first time in 18 months. The question that remains is whether the reduction in February is just a blip on the radar or whether it will become a trend. This is in light of a decrease in the number of Foreclosure cases filed nationally by 24,000 in February from January 2011. The amount of delinquent mortgage loans also dropped in February as compared to the prior month.

As previous blog articles have noted, The Senate Judiciary Committee has cleared the way for the Senate to take up SB 222 which will allow Bankruptcy Judges to set up mandatory loan modification programs in Bankruptcy Cases. If the bill can obtain passage in both chambers of Congress, which is unlikely, we may see even more loan modifications in the future.  If there continues to be a reduction in the number of modifications, will SB 222 gain some more steam? Time will tell.

Weltman, Weinberg & Reis will continue to keep you advised as to activities concerning the Mortgage Industry in Bankruptcy cases.

If you have any questions on this matter, please contact Alan C. Hochheiser, Esq. Alan is the Managing Partner of the Bankruptcy Practice Group of Weltman, Weinberg & Reis, LPA located in Brooklyn Heights. He can be reached at 216.739.5649 or .

The New Congress and Its Effect on Bankruptcy

Published on November 29, 2010 in Bankruptcy Filings and Homeowners Affordable Modification Program. 0 Comments

November 2010 saw a change sweeping through Washington and the country. Republicans regained the majority in the House and made some major gains in the Senate. With new faces in both chambers, new leaders in the House and a steady number of Bankruptcies being filed in the United States, what effect will these changes have on Bankruptcy?

Through the end of September 2010, there were approximately 1.1 million bankruptcy filings in the United States and its Territories according to the United States Bankruptcy Court. A look back at the 12-month period from September 2009 to 2010 shows that approximately 1.6 million cases were filed.  Compared to the 12-month period from September 2008 to 2009, that was an increase of nearly 200,000 filings.  Projections indicate that the number of filings for 2011 may decrease by a small margin. Will the reshaped Congress have any effect on the number of filings? Time will tell, but the chances of seeing the oft talking about change in the Bankruptcy law as to the cram down of mortgages is not likely.

Home Affordable Modification Program (HAMP) was another hot topic in 2010. However, the number of homeowners who were able to qualify for the program to receive permanent modifications and stay current on the modified payments remains low. Although this is a Treasury Department initiative, will we see any changes to the program in 2011? Will there be a Congressional Directive?  Will the investigations that the State Attorney Generals are spearheading lead to rules in individual states that then will carry over into Bankruptcy? These are questions that we hope to find answers for in early 2011.

Change is typically a good thing. However, how the waves of change affect creditor’s accounts in Bankruptcy is like the outcome of a good mystery novel: “To Be Determined.” 

Weltman, Weinberg & Reis will continue to keep you updated on what is occurring in Washington and its effect on Bankruptcy.

If you have any questions on this matter, please contact Alan C. Hochheiser, Esq. Alan is the Managing Partner of the Bankruptcy Practice Group of Weltman, Weinberg & Reis Co., LPA located in the Brooklyn Heights, Ohio office. He can be reached directly at 216.739.5649 or .

New Plan Provision Allows Lien Stripping Without An Adversary Proceeding

Published on September 14, 2010 in Bankruptcy Filings. 0 Comments

Stripping unsecured liens without an adversary proceeding is now easier for debtors in the Northern District of Illinois (Chicago).  The new Model Plan adds a section specifically for lien stripping.  Debtors will be required to use this new plan commencing October 15, 2010, but the plan is available online now, and debtor’s attorneys can start using it immediately. 

Previously, if a plan sought to strip a lien, language to that effect was inserted in the Special Terms section at the end of the plan.  A creditor must be aware of this new section so as not to miss a debtor’s intention to strip its lien.

The new Model Plan adds Sec. E. 3.2, titled Other secured claims treated as unsecured, and is as follows:

The following claims are secured by collateral that either has no value or that is fully encumbered by liens with higher priority. No payment will be made on these claims on account of their secured status, but to the extent that the claims are allowed, they will be paid as unsecured claims, pursuant to Paragraphs 6 and 8 of this section.
(a) Creditor: _________________Collateral:_________________________

This section permits a debtor to declare a lien unsecured and then pay it as an unsecured claim along with other unsecured creditors.  Coupled with Sec. B. 3, which provides that a creditor must release its lien upon discharge (or earlier if the debtor pays off the debt in full), this permits lien stripping without an adversary proceeding.  Liens would be stripped at discharge.

To further trip up lien holders, the plan also provides in Sec. E. 8. that:

Any claim for which the proof of claim asserts secured status, but which is not identified as secured in Paragraphs 2, 3.1, or 3.2 of this section, will be treated under this paragraph to the extent that the claim is allowed without priority.

This means that if a creditor files a secured claim, and it is not listed in these sections, it will be paid as an unsecured claim by operation of the plan.

Some of the judges in the Northern District of Illinois will still require an adversary proceeding to strip liens even if debtors fill out this section.  I’ve talked to the chair of the court’s liaison committee, and this will be on the agenda at the next meeting.  Hopefully, the inquiry will help identify which of our eleven judges will accept the plan provision in lieu of an adversary proceeding.

So, lien holders must now check in three places within the plan to determine the treatment of their claim.  First, look to see if your claim is identified as secured in Sec. E. 2, 3.1, or 3.2.  If it is not listed at all, it will be treated as unsecured.  If it is listed in Sec. E. 3.2, it will be treated as unsecured. Finally, check in the Special Provisions Section at the end of the plan.  If a judge still requires an adversary proceeding, the intention to file an adversary to strip the lien and pay the claim as unsecured may be listed there.

If you have any questions on this matter, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached directly at 312-253-9614 or via email at .