It’s important to know what debt is priority and what debt is non-priority. It’s also important to know whether or not you filed your returns. A lot of our clients, especially the business owners, have un-filed returns and sometimes, they don’t even know about it. I had a gentleman the other day that had un-filed returns for 2011, and he didn’t even know. And he said “No. I filed my tax return for 2011” and he said “No, I couldn’t do the IRS.’ He called his tax guy; his tax guy forgot to mail it in. So, they were trying to correct some — a debt that they claimed he owed for 2011 that he didn’t owe once he filed the return. So, sometimes, you may be in trouble with the IRS and not even know about it because your tax preparer hasn’t done what they’re supposed to do.
What about back taxes that are owed to the IRS? Would Chapter 13 protect against that?
Great question. the answer is Yes. Chapter 13 applies to the IRS. The IRS is a debt collection agency that represents the federal government. They’re collected just like everyone else. And when you file the bankruptcy, they have to stop debt collection activities, like garnishments, levies. They may have already placed a lean against some of your assets, the lean is valid. In bankruptcy, you would have to avoid like a second or a third but you can avoid it if the circumstances are right and we actually just do that for the client of ours. But the — when it comes to the government, there’s what we call priority debt and non-priority debt. If the debt is priority, which usually is 3-years old on a filed return, it has to be paid in full. If the debt is non-priority, which is more than 3-years old on a filed return, let’s say you owe money for 2010 and you filed your return in 2011 when you were supposed to, that debt is probably non-priority and can be discharged.
The lender actually won’t accept payments from you? Again, a lot of people just say “You know what? I had a hardship, but I’m back on my feet. I got a new job. Why won’t they accept my payments? I don’t know what to do”. I say, well, you’ll have to do Chapter 13 because when you’re in Chapter 13, the lender has to accept your payments. So, a lot of people use Chapter 13 to get their mortgage payments accepted by the lender.
The requirement of Chapter 13 is that you resume your pre-default regular monthly mortgage payments beginning in the month after we file for you. However, your only alternative under the state law is to clear the arrears on a lump sum, which many people cannot do. So, the bankruptcy allows you to take those arrears and spread them out over a 5-year period while resuming your monthly mortgage payment. The reason that’s important is because once the lender issues a Notice of Default, under California state law, they are not allowed to accept a payment from you. So, you couldn’t pay the mortgage if you wanted to. If you want to just try to start paying your mortgage again, they can’t accept those payments because if they do, it resets the foreclosure timeline and they don’t want to do that.