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Posts Tagged ‘Discharge’

Does a Judgment for Fraud Issued by a State Court Act as Res Judicata in a Bankruptcy Dischargability Proceeding?

Monday, November 9th, 2009

Simply put, no.

I’ll start by stating that fraud and its appendages as found under section 523 of the bankruptcy code are nondischargeable debts (meaning they survive bankruptcy) .

Now we must define res judicata. In its most basic terms, res judicata prevents a dispute already ruled upon by a previous court to be disputed again in another court.

Being found liable for fraud or absolved of same in a state court proceeding will carry res judicata effect on any subsequent proceeding minus appeal and a very important exception: Bankruptcy.

In Brown v. Felson, 442 U.S. 127, 1979, the U.S. Supreme Court held that “the bankruptcy court is not confined to a review of the judgment and record in the prior state-court proceedings when considering the dischargeability of a debt.”

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Want to Discharge Taxes in Bankruptcy? Then Avoid Getting a Tax Lien!

Monday, October 26th, 2009

Imagine the horror of discovering that despite your success in dischargeing your personal liability for an income tax debt, your tax lien has survived?! Though a Chapter 7 bankruptcy can eliminate personal liability for qualifying tax debts and thus, preventing bank account levies and wage garnishments, it will not discharge a tax lien. If a tax lien is recorded prior to your bankruptcy filing, the tax debt becomes secured and therefore, not dischargeable. However, the debt is only enforceable against the property (real and/or personal) it is secured against and never enforceable against  any other property obtained after bankruptcy.

The tax lien is also only enforceable to the extent that it is actually secured against the property and any unsecured portion is deemed discharged. Here is a simplified example regarding real property: Bob Bankruptcy has a house with a $100,000 mortgage and a $50,000 tax lien. One year after bankruptcy, Bob sells his house for $125,000. After the mortgage is paid, only $25,000 is applied to the $50,000 secured tax debt. As a result, the remaining $25,000 unsecured tax debt is deemed un-collectible as it was effectively discharged in Bob’s bankruptcy.
I know what you main be thinking — these tax liens have priority over all other liens, right? Not true. In fact, surprisingly, income tax liens do not take priority over mortgages or any other liens recorded earlier in time. Thus, the tax lien will be paid only after the mortgage and any prior recorded liens are paid and then only to the extent that there are sufficient proceeds available. Please do not confuse income tax liens with property tax debts, which take priority over all other liens, even mortgages.

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Discharge State and Federal Taxes in Bankruptcy? The Answer May Surprise You.

Monday, October 26th, 2009

How many bankruptcy attorneys simply do not know that certain taxes can often be eliminated in bankruptcy? In a word, many. The truth is that most attorneys do not have a working understanding of which tax debts can be discharged,  and more specifically, the timing rules that control tax debt dischargeability.

You can discharge (wipe out) both state AND federal income taxes in both Chapter 7 and Chapter 13 bankruptcies, if you satisfy ALL of the following five requirements.

  1. Your taxes MUST be income taxes: Only income taxes are dischargeable. Other taxes such as payroll taxes, sales taxes, and property taxes cannot be discharged in bankruptcy.
  2. No fraud or willful evasion: Discharge is not available to those who have filed a fraudulent tax return or made any attempt to willfully evade paying taxes.
  3. Your taxes MUST be three years old: A Qualifying tax debt is one that was originally due at least three years before filing bankruptcy. (Example: Taxes due for the tax year 2006 were actually due April 15, 2007. Therefore, you must wait until April 15, 2010 to file if you want to eliminate debt. However, if you filed an extension for these taxes until October 15th, you also extend the three-year period to October 15th, 2010!
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