The truth is income taxes are dischargeable in bankruptcy if 3 reasonably simple conditions are met;  debts to the government are generally dischargeable in bankruptcy.

Please reread that line, and get that bit of law in your head.

Because you wouldn’t know the truth of the statement above from reading the blog of this lawyer (who puts himself forward as an expert on bankruptcy law) whose opening line is utterly and absolutely wrong on the law.

Is Vincent Howard of Orange County  really giving this information out to his clients? I surely hope not.

We routinely tell our clients, he assures us, “that tax debts are not dischargeable in bankruptcy. The public policy goal of this rule is clear: bankruptcy must not allow debtors to escape debts to the government…”

Hogwash!

The Simple Truth About Discharging Taxes In Bankruptcy

The Bankruptcy Code starts from the proposition that all unsecured debts are dischargeable, and calls out the exceptions in Section 523.

A bit oversimplified, the rule is this:   income taxes can be wiped out in bankruptcy if the return was due without penalty more than three years before the bankruptcy case is filed;  if the return was filed late, it has been on file for two years; and the taxes in question were assessed more than 240 days before the bankruptcy was filed.

So, the correct statement of the law is that some income taxes cannot be discharged;  other, older income taxes can be discharged.

Discharge Of Debts To The Government

Despite what the Howard Law Firm says, debts to the government are generally dischargeable.  Debts for overpayment by the Social Security Administration can be discharged;  SBA loans, guaranteed by the government are dischargeable.  Again, nondischargeability is the exception, not the rule.

Just Because The Website Says So, Doesn’t Make It True

Perhaps the democratization of publishing that came with the internet and blogging software was a mixed blessing.  For every genuine contribution to the public’s understanding of  bankruptcy law, there’s some lawyer writing about bankruptcy to get his name before his community, without regard to the accuracy of the information he puts out.  And if he genuinely believes the law is as his blog states, then he stands to harm his clients.

As lawyers, we have a duty to the public to get this stuff right.  The public is injured when someone who has the credentials that suggest he is a reliable source spreads inaccuracies.

Bankruptcy law is complicated, sometimes uncertain, and these days, evolving as the courts interpret the mess that is “bankruptcy reform”.  But the law about the dischargeability of taxes hasn’t changed markedly in more than three decades.

If you are a consumer or small businessperson trying to get your arms around what bankruptcy offers, read on here.  Test propositions about the law across several sites.  Buy an hour of an experienced  bankruptcy lawyer’s time and double check what your internet research has turned up.

The world of bankruptcy information on the internet is a jungle.

My firm is hip deep in bankruptcy cases we’ve taken on after the first attorney screwed things up.  Most of the problems seem fixable, some may resist rescue.

But the clients will end up paying twice;  the cost will undoubtedly be greater than if they’d paid for competent counsel to do it right the first time.

We have three conversions from Chapter 11 to Chapter 7 involving significant real estate assets.

We have cases where big ticket assets were omitted.  We have cases where the initial attorney just didn’t persist with the debtor to get the schedules right, and ones where counsel didn’t explore the choice of chapter.

Almost without exception, the debtors chose counsel based on price.  They went with the lower price for their bankruptcy case, and they bought a rat’s nest.

Why is it that notions of economy only surface after a client has wracked up tens of thousands of dollars in debt?

Many of the debtors gave less thought to credit card expenditures or purchases of investment real estate during the boom than they give to picking a bankruptcy lawyer.

The influx of lawyers to this field and the prevalence of lawyer advertizing suggest bankruptcy law is a commodity.  Lawyers with no track record to tout or past clients to spread the word  compete on price.  If you can buy a $15 toaster, why pay $30? goes the thinking.

The existence of non lawyer petition preparers and do it yourself books reinforce the idea that bankruptcy is more like playing Go Fish than contract bridge.

Then, there are the official forms, suggesting that filing bankruptcy is all about the paper and not about the disclosure.

Quality of counsel is not reliably correlated with price:  I’ve seen some utter newbie lawyers charging more than highly skilled veterans for an inferior product.  But capable counsel is seldom the cheapest.

So, my charge to those needing bankruptcy relief is to consider that hiring the least expensive lawyer is a poor bargain.

Another time, I’ll talk about how to assess a lawyer’s suitability for your case.

Image courtesy of purpleslog.

I cringe when a client says that they’ve researched bankruptcy on the internet before making an appointment with me.

For every sound, balanced, nuanced article on consumers and their debts, there are bunches of sloppy, inaccurate sites, often trying to make bankruptcy so frightening that you’ll buy whatever they’re selling.

But when a group of bankruptcy lawyers, trying, I’d assume, to provide useful information on bankruptcy get it so wrong, I’m perplexed.

Bankruptcy Home, which identifies itself as a group advertising site for bankruptcy lawyers, has community property absolutely wrong.  At least California community property, which is all I’m licensed to deal with.

When one spouse in a community property state files bankruptcy, the site says, the debtor must include the value of one half of the community property.  Wrong, wrong, wrong!

I don’t know whether these lawyers haven’t read the bankruptcy code or haven’t read the site that they pay for.  Neither alternative is flattering to them.

All Community Property Comes In

Here’s what  section 541 of the bankruptcy code says:

 (a) The commencement of a case …creates an estate. Such estate is comprised of all the following property…

(2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—

 (A) under the sole, equal, or joint management and control of the debtor; or

(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

Image courtesy of Tambako the Jaguar.