The betrothed beneficiaries of the humorously titled “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (BAPCPA) were the big banks and credit card companies lobbying pays off to donate money. The latest law likewise helps people with alimony and child support awards. But a third winner was your congenial, backyard tax collector. In all-purpose, the BAPCPA makes bankruptcies more awkward and expensive. But it also exempts certain taxes that were previously dischargeable, and lengthens waiting periods before other taxes become dischargeable. In addition, overdue taxpayers are forthwith mandatory to file unfiled returns, to stay in compliance thenceforward, and to provide copies of returns to creditors and to the trustee. Notwithstanding, for some individuals, bankruptcy can yet be useful in dealing with troublesome tax debts.
Individual debtors typically apply either Chapter 7 or Chapter 13. In Chapter 7, a trustee protects the interests of unsecured creditors. (Secured creditors are already safe by liens on the debtor’s assets.) Taxable assets, if any, are sold. Completely encumbered assets are mostly abandoned, subject to the liens. No payments from post-petition earnings are mandatory.
Chapter 13 is for those who can give monthly payments. A debtor can’t take unsecured debts of more than $307,675, nor secured debts of more than $922,975. Payments are based on the debtor’s ability to pay. The trustee makes distributions to the creditors in accordance with their priority under the Bankruptcy Code. For a Chapter 13 plan to be confirmed, the payments must cover all priority debts in full. Afterwards the required payments, all dischargeable debts that exist unpaid are discharged. In the past, payments ran for as short as three years. But under the BAPCPA, a few debtors will be required to make payments for five years. Worsened still, the computing of the capacity to pay will now be based on the IRS’s standards for permissible living expenses. (Therefore, many bankruptcy lawyers who never earlier thought about taxes or IRS procedures are now getting a crash course in “IRS Law.”)
Prior to the BAPCPA, Chapter 11 was rarely used by people, but was mostly for businesses seeking to “reorganize” their debts. A Chapter 11 is more difficult and pricey than a Chapter 7 or Chapter 13. But after the BAPCPA, there will be debtors who can’t exercise Chapter 7, but who owe too much for a Chapter 13. These underpriveleged souls could have to use Chapter 11, with the attendant difficultly, delay and expense.