When Bankruptcy is Urgent

Sometimes it is not at all obvious when a bankruptcy is urgent. Certainly, bankruptcy is urgent if it must be filed to stop a foreclosure or to stop a lawsuit. But there are other urgencies that are far less evident. For instance:

Divorce. Are you engaged in a divorce? A bankruptcy filed before the divorce by one party may significantly impact the division of the community property. The way the divorce decree is composed could effect a future bankruptcy.

Phantom gains. Are you threatened with a foreclosure of property that is "upside down?" If you own (or if a subchapter S corporation or partnership that you have an interest in owns) property that has a value that is significantly more than its tax basis and that property is posted for foreclosure, then a bankruptcy may be urgent. Why? Because the foreclosure could create what is known as phantom gain and result you being taxed for the difference between the tax basis and the foreclosure sale price (which is often the total amount of the note plus attorney fees). This is called a phantom gain because you end up with the gain - and the tax - but no income from the sale to pay the tax. Phantom gains are non-dischargeable in a bankruptcy filed within in three years of the due date of the taxes for the year in which the gain was incurred. HOWEVER, a bankruptcy filed before the foreclosure can completely avoid phantom gain. It is for this reason that a bankruptcy filed before a foreclosure may be very urgent.

Federal tax lien. If the IRS about to file a federal tax lien against your house, then a bankruptcy may very be urgent. Why? Because a federal tax lien immediately removes equity from your home and you can stop prevent this by filing a bankruptcy before IRS files their lien. If those taxes are dischargeable in a bankruptcy (and sometimes they are), then you could save your house and discharge your taxes by filing a bankruptcy before IRS files their lien. If the taxes are not dischargeable, then you can file a reorganization type bankruptcy and pay out the taxes without interest and penalty.

Employment taxes and sales taxes. If your business is falling behind in employment taxes or sales taxes, a bankruptcy may be urgent. Why? Because these taxes are forever nondischargeable in bankruptcy and if you are defaulting on them, you are already in too deep. Now is the time to consider a bankruptcy. Delinquent employment tax is a clear indication that it is time to consider bankruptcy protection.

Exempt property. If you are using exempt property (401(k) funds, IRAs, retirement funds or home equity) to prop up your business, or to pay credit cards, then stop right now and reconsider what you are doing. You are throwing away your future - as well as what may be the only thing that will enable you to start a new business because you are giving away exempt assets - assets that the credit card companies never expected to get and assets that cannot be lost in a bankruptcy. If you are using exempt personal assets to prop up a business, it is foolhardy not to find out where you really stand and whether a bankruptcy proceeding could save those assets as well as your business.

Release of debt. If someone is just about to release you from a significant amount of debt, then a bankruptcy may be urgent. Why? Because release of debt outside of bankruptcy can create tax problems for you. The amount that is released can be considered taxable income. That same debt discharged in bankruptcy is tax free.

Contractors. Are you a contractor? Are you using money from one job to pay the expenses of another and not paying your suppliers or subs? In Texas, this is a crime. Bankruptcy may or may not be an option, but your situation is urgent.

Lawsuit alleging fraud. If someone sued you and alleged that you have committed fraud, then your bankruptcy may be urgent. Why? Because if you permit him to get a judgment for fraud, then you may have thrown away your opportunity to discharge the debt - even if there was no fraud involved at all. The bankruptcy court may have to take that judgment for fraud at face value. And just because you did not hire a lawyer or defend it may make no difference at all.

Ex-spouse bankruptcy. Has your ex-spouse filed a bankruptcy? Does he (or she) owe you money? Is there alimony or a community property division? Are you nearing the 60th day after the First Meeting of Creditors in the bankruptcy? If so, then you need to speak to a bankruptcy lawyer quickly. Why? Because after the 60th day passes you lose all rights to contest the discharge of any debt other than alimony, child support and other debt created by the divorce decree or community property separation (alimony, child support and other debt created by the family court is automatically non-dischargeable).

Tax basis too low. If you have property that you can't sell because it has been depreciated too much, then bankruptcy can be useful in avoiding those taxes. How? By shifting the gain to the bankruptcy estate. How can this be done without triggering a gain? Bankruptcy causes all assets of the debtor to transfer into the bankruptcy estate. That transfer is not a taxable transfer.

Marriage cracking under debt stress? You can spend your life and your family and your future fighting an impossible debt burden hoping that somehow it will all get paid. But only one thing can really make the debt disappear and make you free again. Heavy stress on marriage is commonplace.

Feel guilty about bankruptcy? Consider this. The same Congress that passed the laws that make you vulnerable to creditors also wrote the Bankruptcy Code. Both of them apply. The laws of this country provide for both ends of the spectrum. There is a limit to what they can do to you.

Still feel guilty? Does God disapprove of those who file bankruptcy? Probably not, because God invented bankruptcy. See Deuteronomy 15 and look at our page on ethics and bankruptcy. No one, not even God, disapproves of a honest debtor who avails himself of his legal remedy to remove himself from an impossible burden of debt.

Judgments. Does someone have a judgment against you? If so, then a bankruptcy may well be urgent. Why? Because someone with a judgment can seize your bank account and other non-exempt property.

Charles Chesnutt