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Bankruptcy

 

&

 

Local

 

Tax

 

Collection

September 2011

Chris McLaughlin

mclaughlin@sog.unc.edu

Our

 

Expert

 

Panel

David F. Mills, Attorney at Law 

david@mills‐law.com

Jim Lanik, Roberson Haworth 

& Reese, PLLC 

David Warren, Poyner Spruill LLP

dmwarren@poynerspruill.com

Becky Smith, Durham County Tax Office bsmith@durhamcountync.gov

What

 

is

 

bankruptcy?

Opportunity for debtor to get “fresh start”

Liquidation or Reorganization of assets

Discharge of debts

Governed by federal law

(2)

If

 

You

 

Only

 

Remember

 

1

 

Thing

 

About

 

Bankruptcy,

 

Remember

 

This:

Automatic

 

Stay

STOP!!!!!!!!!

Affects

 

ALL

 

collection

 

efforts

Until

 

•Dismissal  •Discharge

Sanctions

Example

 

– Foreclosure

 

Sale

You have a foreclosure sale of Tommy Tarheel’s home scheduled for tomorrow.  Tommy’s lawyer  calls and says he is filing for bankruptcy today  and demands that you cancel the sale. 

What do you do?

1. Say, “Who cares?” and hang up on the lawyer.

2. Cancel the sale.

3. Ask the lawyer to send you a proof that the  bankruptcy petition has been filed.

Example:

 

Wage

 

Garnishment

I have a wage garnishment in place for Tommy  Tarheel.  After I get this month’s garnishment,  Tommy hands me a copy of his bankruptcy petition  filed two weeks ago. 

What should I do?

1. Find another job, quick.

2. Stop the garnishment but keep the $$.

3. Stop the garnishment and return the money to  the court.

(3)

Example

 ‐

Bankruptcy

Tommy Tarheel is in bankruptcy on May 1st

What should you do?

 report his delinquent RMV taxes to the DMV so  they can place a block on his registration?

 advertise his delinquent real property taxes?

2

 

Key

 

Questions

When

 

did

 

the

 

debtor

 

file

 

the

 

petition?

What

 

chapter?

Secured

 

claims

Secured claims are those which are secured by  a lien on the Debtor’s property.  

Liens for secured claims (usually) remain  enforceable after the bankruptcy proceeding  ends.

(4)

Which

 

of

 

these

 

are

 

secured

taxes?

1.

Property taxes on my house.

2.

Property taxes on my boat.

3.

Property taxes on my RMV.

4.

All of the above.

Administrative

 

claims

Administrative claims are taxes which are  incurred afterthe bankruptcy petition is filed.  

Administrative claims are not discharged. 

When allowed, administrative claims are paid 

before (almost) all other claims.

When

 

Are

 

Taxes

 

“Incurred”

 

For

 

Bankruptcy

 

Purposes?

On the date the ownership, value and situs is  determined (aka the listing date)

Taxes on Real Property and Personal Property  (other than RMVs):

–January 1 

Taxes on RMVs:

(5)

Example

Administrative

 

Claims

I file for bankruptcy on January 2, 2011. 

Which tax claims are administrative claims?

1. 2010 taxes on my house.

2. 2011 taxes on my house.

3. Both.

4. Neither.

Priority

 

claims

Unsecuredclaims only 

Incurred priorto the bankruptcy 

Last payable without penalty/interest within  one year of the filing of the petition 

Should be paid during bankruptcy if proof of  claim is filed.

Enforceable after bankruptcy 

–(except in Ch. 13 and corporate Ch. 11 cases) 

Example

Priority

 

Claims

I file for bankruptcy on Jan. 2, 2011. 

Which of these tax claims are priority claims?

1. 2009 taxes on my house.

2. 2010 taxes on my house.

3. 2010 taxes on my RMV.

4. All.

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Non

priority

 

unsecured

 

claims

Not secured, administrative, priority or  penalty claims

Discharged and NOTenforceable  post‐bankruptcy

Discharge

Successful completion of a bankruptcy  proceeding

Debtor not personally liable for discharged  debts

No attachment/garnishment, levy/sale

Foreclosure still an option for liens that  survive bankruptcy

Not

Discharged

 Administrative claims

 Most liens (secured claims)

 Priority tax claims, except in Ch. 13 and corporate Ch.  11 cases

(7)

Dismissal

 Unsuccessfully termination of bankruptcy

 A dismissal means that the bankruptcy case has  no further legal significance.  

 Creditors retain their rights as if the case had not  occurred. 

Chapter

 

7

Liquidation(sale) of Debtor’s assets by a  court‐appointed trustee

Sale proceeds paid to creditors based on the  priority of their claims

Chapter

 

7

 Can liquidate only non‐exempt assets

 Most cases are “no asset” cases

 Do not file a claim until notified to do so

–Trustee will ask for claims only when there are  assets to sell.

(8)

Chapter

 

13

Reorganizationfor individuals with regular  income (“wage earner” bankruptcy)

Reorganization plan of 3 to 5 years

Once the court confirms the plan, debtor pays  portion of earnings to trustee

Trustee pays creditors according to plan and  priority of claims 

Chapter

 

13

Tax collector should file proofs of claim

Make sure debtor doesn’t misstate tax claims  in plan/proofs of claim

Discharge after plan is completed eliminates  all prepetition claims (even priority claims)

Dismissal or conversion to Chapter 7 for  failure to satisfy plan

Chapter

 

11

Business reorganization 

Reorganization plan is filed stating who is to  be paid, and when

(9)

Chapter

 

11

Usually no trustee

Often very complicated business  reorganization

Plan should be reviewed for treatment of liens  and payment terms.

Example

 

– Back

 

Taxes

Roy owes Carolina County three years of back taxes.  He filed for Chapter 13 bankruptcy in November. In  February he mails the county a check for two years  of taxes. 

Should Carolina County keep the $$?

1. Yes.

2. No.

Example

Delinquent

 

Property

 

Taxes

Coach K filed for bankruptcy in December.  In January,  the taxes on property listed by Coach K’s Donuts, Inc.  became delinquent.  Coach K is the sole shareholder  of the donut corporation.

Can you attach the corporation’s bank accounts? 

1. Yes

(10)

Example

 

– Delinquent

 

Real

 

Property

 

Taxes

Roy’s 2009 real property taxes are delinquent. He  files for bankruptcy on Feb. 1, 2011. On March 1,  2011, the court dismisses Roy’s petition. 

May you begin foreclosure proceedings on Roy’s 

property for the 2009 taxes in June?

1. Yes

2. No

Two

 

Helpful

 

Bankruptcy

 

Guides

David

 

Warren’s

 

manuscript

 

distributed

 

prior

 

to

 

the

 

webinar

SOG

 

Propety

 

Tax

 

Bulletin

 

#139,

 

“Collecting

 

Taxes

 

in

 

Bankruptcy”

•Shea Denning / Bob Price

(11)

Our

 

Expert

 

Panel

David F. Mills, Attorney at Law 

david@mills‐law.com

Jim Lanik, Roberson Haworth 

& Reese, PLLC  Jlanik@rhrlaw.com

David Warren, Poyner Spruill LLP

dmwarren@poynerspruill.com

Becky Smith, Durham County Tax Office bsmith@durhamcountync.gov

evaluation We would appreciate your feedback. Please fill out our short 

References

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