Newbie, w/ some questions :) debt and taxes

[Jooniper]

Hello! This is my first post! What a great forum w/ awesome info! I've been lurking for a couple weeks and was referred by a friend from a mommy forum.

Heres my deal... sorry for the novel!

I started and ended a business. 1999-2005. It would have been a very successful business had I been able to charge people what they should have been charged and known more about the tax system. Thats why I'm here.

Before the business I owed about $4,000.00 in student loans.

When I opened the business, I opened several credit cards, and by the end of the business they were all maxed. In 2005 I owed about $20,000.00 in CC debt and about $40,000.00 to the IRS and about $5000.00 in state taxes.

In 2005, I married and we filed our taxes separately. All of the CCs are in my name, my maiden name. I have not charged ANYTHING since before we were married and have not made payments to any of the CC companies in over 2 years.

Now. I have no idea what I owe to the CC companies (they stopped sending me statements, now all I get is collection letters and from only some of them) I did get a credit report from Experian, about a year ago, and not all debts were listed. I would guess it to be between $25,000.00 and $30,000.00 and to the IRS I owe about $48,000.00. I make very minimal payments to the state taxes, 2 collection companies (both capital 1,) and my student loans. And... in July, I had to have a pre-cancerous tumor removed from my neck. Dr. said it would be covered by insurance, it wasn't. Thats another $20,000.00. No payments have been made and hospital is trying to discharge the debt due to inability to pay.
I don't work (haven't since the business), I'm a stay at home mom, so I have no income (which seems to be working to our advantage), but my husband does. We have separate bank accounts and we filed jointly on our taxes in 2006 (only his income) and the IRS and the state (as expected) took his refund money to pay my debt.

I talked to a BK attorney (about a year and 1/2 ago )and he said to file for an OIC (offer in compromise) w/ the IRS before I look into BK. Apparently, you can not file for an OIC while in or (I believe) recently in BK. He recommended a tax guy and we just sent in my offer on 1/24/08. We offered $3200 ( the value of my only asset, my car) on a 2 year repayment plan. I have no income to add to the offer, and husbands just barely covers our necessities. Who knows how long till we receive word if they accept it or not. The tax guy said if they don't accept mine, he wasn't going to do them anymore. He did also say that when we got done w/ the OIC that he would file *something* to get the tax refunds back. Its funny how this whole system works, cause I will end up just sending it back to them anyway, to help pay for the balance of the offer.

BTW, we don't really own anything except my car, in my name.

Now for my questions Thanks for getting this far!!!


*Does it sound like I'm on track?

*Since all of the debt is in my name, am I the only one that has to file BK? or does my husband too? he has NO debt.

*W/ the payments to the IRS we hope to pay them off sooner than the 2 years, but can I still file BK while making those payments? Anyone know how that works?

*Whats the worst that could happen if I don't pay on the CCs or the collection lawyers?


I don't care what they take, they can take EVERYTHING that I have (which is not much) I just wanna get through this so we can move on. I know, from reading other posts, I'm not the only one in this sad state of financial mess and in a crazy kind of way that has comforted and inspired me.

I know I have more questions I just cant think of them right now.

Thanks for any opinions, replies and advice!

[phoenyx]

Between the two of us, we could fill rooms with novels.

It sounds like you're on track, however I would start talking with a few bankruptcy attorneys again - a lot of them offer free initial consultations. Or, if you liked the attorney you spoke to 1.5 years ago and he's still around, talk to him as well.

Generally speaking, if your husband's name isn't on any of the debt you're trying to discharge, you can file bankruptcy singly and leave him off of it. Any debts that are jointly in both of your names, or any debts that are in his name only would remain owed by him. However, there are several states that are designated community property states -- which complicates the situation somewhat. I'm not very familiar with community property state implications since I'm not involved in it. If you're in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington State, or Wisconsin, you'll have to look into what impact this has and if it forces your husband more into the middle of all this.

I'm not sure about filing bankruptcy after entering an IRS payment agreement.

If you don't pay the creditcards or the collection agencies, they can sue you for the original balance plus interest/penalties accrued to date plus court costs plus reasonable attorney/collection costs.

If you don't show up for the court date, a default judgment is ordered. Talk to an attorney, but often if you don't have any way to fight that you owe the debt, and don't disagree with the amount, not showing and allowing a default judgment can be benefitial.

If you show up for the court date and lose, a judgment is ordered.

A judgment will specify how long you have to pay back the amount, usually around 30 days.

If the judgment amount isn't paid back in the given timeframe, the plantiff can ask the court for permission to go after your assets. They can levy/garnish funds from any bank accounts that have your name attached to them, take certain percentages of any income that you make, take income tax refunds, or redirect any money that is owed to you, to them. Generally, all this would be done in your name only since your husband isn't on the debts -- but again in a community property state this would likely be different.

If they can't find any assets to levy/garnish, they can't do anything else. If you find yourself in this situation, you are referred to as being "judgment proof".

Some people who are "judgment proof" decide not to even file bankruptcy, but just wait until the statue of limitations expires on their debts. That would be something to discuss with the attorney. Doesn't sound like something you would be interest in, wanting to get it all behind you.

[phoenyx]

OK, a new post with thoughts I had about the taxes that you owe. I'm in a similar situation, with my S-Corp owing the IRS and the state a lot of taxes.

How was your business organized? (Sole Proprietorship, Corporation, S-Corporation, LLC, etc?)

If it was it's own entity, being incorporated or an LLC, not all of the business tax liability will be personally owed by you. If it was just a sole proprietorship, then you would of course personally owe everything.

As for the IRS, you would only personally owe taxes through the Trust Fund Recovery Penalty. This is assessed for "trust fund taxes" which are federal withholding tax from employees, and the employee portion of FICA tax. The employer portion of FICA tax isn't transferred to its owner. Federal unemployment (FUTA) taxes I don't think are transferred to its owner. Penalties and interest assessed against the business aren't generally transferred to its owner, either.

As for the State, it depends on your state's laws. Almost all states hold the owner liable for unpaid withholding and sales taxes. Michigan doesn't hold its owners liable for unpaid state unemployment tax, but I'm not sure about other states.

I would strongly recommend getting and reading "The IRS Problem Solver" by Daniel Pilla. It's a great book about how to get penalties and interest (against you personally) abated in certain circumstances, and how to go about offers in compromise.


If you have any personal income taxes owed, I'd suggest looking at a post I just made about an hour ago on http://www.bkforum.com/showthread.php?t=21302 which discusses the limited circumstances that a Chapter 7 bankruptcy can discharge personal income tax -- this doesn't apply to the business taxes you're involved with.

[Jooniper]

Woot! I live in Oregon! Thanks for the info on the judgment stuff. We do have the separate accounts (for levy reasons, the IRS and Oregon have both had their way w/ my account) and I have no income for them to take. I believe I would be considered "judgement proof", but like you said I would like to get this done. Thanks so much for your info phoenyx.

[Jooniper]

It was a Sole Proprietorship. I owe it all.

I will for sure look for that book. Thanks!

Going to go read that post now

[CindyLou]

If your taxes have been filed since 05, then you might soon be eligible to discharge them in BK. This is a complicated situation that needs to be discussed with a BK attorney BEFORE you decide to accept the offer in compromise.

[phoenyx]

If your taxes have been filed since 05, then you might soon be eligible to discharge them in BK. This is a complicated situation that needs to be discussed with a BK attorney BEFORE you decide to accept the offer in compromise.

I think it's only income taxes that are dischargable, that are old, isn't it?

I'm not sure if Jooniper's taxes owed to the IRS and her state are purely income taxes are not.

Jooniper, is it all income tax, or are there other taxes owed?

[Jooniper]

Its all income except $500.00 on a 941 the rest is 1040 (does that sound right?). LOL! Thats why I'm here! I don't know anything from anything! I actually think that I have some kind of mental block about tax stuff. I really appreciate all your info. I am going to get a hold of BK attorney today and see what they have to say. I hate to be making a mistake.

How old do the taxes have to be to be discharged? I know that I have read that on here somewhere, but I don't remember. Thanks you guys

[Jooniper]

Wonder why the CPA (who did the OIC) wouldn't have mentioned this, unless he was just trying to get paid.....

He does seems like a good honest guy, so I don't mean to put him down. I'm sure its my own fault for waiting between attorney to CPA, that year and 1/2 could make a big difference.

[phoenyx]

Its all income except $500.00 on a 941 the rest is 1040 (does that sound right?). LOL! Thats why I'm here! I don't know anything from anything! I actually think that I have some kind of mental block about tax stuff. I really appreciate all your info. I am going to get a hold of BK attorney today and see what they have to say. I hate to be making a mistake.

How old do the taxes have to be to be discharged? I know that I have read that on here somewhere, but I don't remember. Thanks you guys

That's good for you that almost all of the taxes are income taxes. Those are the only type of taxes that have a chance at being discharged in a Chapter 7 bankruptcy. There's a post that I made before that I linked to previously that discusses the ability to discharge income taxes, here's the excerpt from it that I think may apply to you. Definately, like you said, talk to a bankruptcy attorney about trying to do this. It can sometimes be tricky.

Only personal income taxes have a chance at being discharged in a Chapter 7 bankruptcy. See the rules on this below. Taxes that are considered "trust" taxes such as federal withholding, FICA withholding (employee portion), state withholding, state sales tax, etc, are not dischargable in a Chapter 7 bankruptcy.

If a taxing authority has filed a tax lien against you, that becomes a secured lien on all of your property.

Taxes without leins that are not dischargable (principal, penalty, and interest) are considered "priority unsecured debts", meaning they get first dibs over all the other unsecured creditors.

Taxes without leins that are dischargable (principal, penalty, and interest) are considered unsecured debts, and get the same treatment that other unsecured creditors get.

For personal income taxes to be discharged in a Chapter 7 bankruptcy, the tax must be due on a tax return filed more than three years ago before the date of filing. Extensions do count, and push the date forward. Taxes on a tax return that was filed late, within two years before the date of filing may not be discharged. Additionally, taxes assesed in the 240 days before filing and taxes that are not yet assessed but are still assessable cannot be discharged in a Chapter 7 bankruptcy. Of course, if there was wilful fraud, the taxes cannot be discharged either.

[Jooniper]

For personal income taxes to be discharged in a Chapter 7 bankruptcy, the tax must be due on a tax return filed more than three years ago before the date of filing. Extensions do count, and push the date forward. Taxes on a tax return that was filed late, within two years before the date of filing may not be discharged. Additionally, taxes assesed in the 240 days before filing and taxes that are not yet assessed but are still assessable cannot be discharged in a Chapter 7 bankruptcy. Of course, if there was wilful fraud, the taxes cannot be discharged either.

Haha! thats where I read it! Terrible memory I have!

All of them were filed late. 2001-2003 were all filed late in 2004 and 2004 and 2005 (2005 might have had an extension) were filed late in 2006. That could be why it was never suggested. Thank you guys, so much, for your info. It means the world to me right now!

[phoenyx]

Haha! thats where I read it! Terrible memory I have!

All of them were filed late. 2001-2003 were all filed late in 2004 and 2004 and 2005 (2005 might have had an extension) were filed late in 2006. That could be why it was never suggested. Thank you guys, so much, for your info. It means the world to me right now!

It might be worth talking to an expert then about the ability to discharge these in a bankruptcy. The way I read the rules, even if it's late, you might be able to discharge the income taxes as long as the filing is more than three years ago. Perhaps some of your income taxes are elligable, and others might be if you wait a bit longer before you file. Definately something worth talking with a bankruptcy attorney familiar with attempting to discharge income taxes.

Good luck!