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Holly Gets Hired After Bankruptcy and Gets a New Company Credit Card Holly was at the end of her rope. She’d been out of work for two years; she kept getting interviews but no offers; and she was feeding partial payments to her creditors, to try to keep them off her back. She believed she was […]

It is generally true in a New York bankruptcy case that the Chapter 7 Trustee has a “look back” period of six years prior to the bankruptcy filing to examine asset transfers and commence litigation to set aside any that are deemed to be fraudulent transfers. This is because the Bankruptcy Code allows a Chapter 7 Trustee to set aside asset transfers that would be “voidable under applicable law by a creditor holding an unsecured claim…”. Essentially the Trustee steps into the shoes of any unsecured creditor in the case to pursue actions to avoid fraudulent transfers. However, when the IRS has an unsecured claim in the case recent case law suggests that the Trustee’s “look back” period is extended by many years.
Federal law (i.e., applicable law) authorizes the IRS to pursue tax collection efforts for ten years from the date of their assessment of a tax being due. In addition, it is well settled that the United States (of which the IRS is an agency) is not bound by state statutes of limitations when it brings suit in either federal court or state court. The net result is the collection remedies available to the IRS include the right to avoid transfers under state law without being hindered by state statutes of limitations. Cases have held that if the IRS has an unsecured claim on the filing date of a bankruptcy case, and if at said time the IRS could have commenced an action to avoid a fraudulent transfer, then the Trustee can step into the shoes of the IRS and avoid any fraudulent transfer that the IRS could, even those beyond the state’s statute of limitations period (i.e., six years in New York).
A recent article in the American Bankruptcy Journal (Jan. 2017, Vol. 36, No. 1) took the fact that the IRS is not bound by state statutes of limitations to its “logical” conclusion and demonstrated how truly scary this can be for debtors. Assume the following hypothetical facts: (1) in 1985 the debtor engaged in a fraudulent transfer when he gifted (i.e., no consideration) valuable art work to his sister, who still has the art work; (2) the IRS assesses a tax liability against debtor in January 1, 2006, which means their ten year period to institute a collection proceeding would end on December 31, 2015; and (3) on December 1, 2015 the debtor files a Chapter 7 case in which the IRS has an unsecured claim, and during the course of the case the Trustee becomes aware of the 1985 fraudulent transfer. Could the Trustee, stepping into the IRS’s shoes, set aside the asset transfer to the sister that occurred 30 years prior to the bankruptcy filing? The case law suggests “yes”. If the IRS would not be barred from setting aside the 30 year old transfer, neither would the Trustee who steps into their shoes.
This is a developing area of law where all of the questions have not yet been answered. However, many of the answers that Courts have issued have not been favorable to debtors. Examples of transfers subject to being set aside are those commonly employed in the area of estate planning and financial planning, and usually involve transfers to family members—the people you least want to see get hurt by your financial problems. When the IRS is a creditor in a case it is imperative that a New York debtor and his attorney examine not only transfers that occurred within the six years prior to the bankruptcy filing, but all transfers going back ten years and beyond.

The U.S. Bankruptcy Code is nothing you have to learn. Wynn at Law, LLC studies it to offer you the best legal guidance for your particular situation. For example, we don’t provide tax advice, but for a bankruptcy filing you’re required to have income tax returns filed for the taxable period the year leading up to the date of your bankruptcy case. It’s a good idea to have four years of preceding income tax returns as well.
It’s early in the year. You don’t have to have them done before meeting with us, but you do have to have them completed before the filing. Without them, you’re up against that Code, and could run into some severe problems when filing bankruptcy under Chapter 13.
Same goes for a Chapter 7 filing. Wynn at Law, LLC doesn’t need your income tax return for our initial meeting, but we will need them to provide to the court and the case trustee. You may be required to file with the court copies of your tax returns that are past due, if you missed prior years. You may even be on the hook for filing future years’ returns with the court if you are filing a Chapter 13.
Here are two tips on timing that you should know:
First, if the IRS has already put a Federal lien on your property for debt you owe them, the lien remains after the bankruptcy filing. You will have to clear the lien before selling the property. Second, when you don’t file taxes before filing bankruptcy, that tax obligation won’t be discharged in a Chapter 7 and may not be distributed in Chapter 13. If you’re due a refund, it may be applied toward the debt you owe or you may be able to keep 100 percent, which is a good thing.
A quick note here: These are income taxes that are discharged in Chapter 7 or Chapter 13. If you owe penalties (fraud, early distributions, etc.) or payroll taxes, Chapter 7 doesn’t wipe those out.
 
*The content and material in this original post is for informational purposes only and does not constitute legal advice.
The post Even in bankruptcy, file your taxes appeared first on Wynn at Law, LLC.

Nobody sets out with the goal of wanting to file for bankruptcy relief. However, things happen in one’s financial life which can lead to that eventuality. For many, there is an unwillingness to jump in and do what makes financial sense. Many people put off filing with the hope that somehow, someway, either their ship+ Read More
The post Hesitating To File Bankruptcy Can Cost You Thousands Of Dollars appeared first on David M. Siegel.