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Natalie Hawkins, mother of 15 year old Olympic gold gymnast Gabby Douglas filed Chapter 13 bankruptcy earlier this year in part due to expenses related to her daughter’s training.  The good new is that Gabby just signed a three million dollar endorsement deal with Kellogs and vows that the first thing she is going to do is help her mom out financially.  Way to go Gabby.

http://www.huffingtonpost.com/2012/08/05/gabby-douglas-mother-natalie-hawkins-bankruptcy_n_1744029.html

http://www.essence.com/2012/08/05/gabby-douglas-stands-to-earn-millions-in-endorsements/

Contrary to popular belief, a taxpayer may discharge income taxes in bankruptcy as long as the bankruptcy is not filed too soon after the tax return is filed.  As a general rule, you can discharge income taxes that become due more than 3 years before filing bankruptcy, as long as it has been at least 2 years since you filed the tax return and more than 240 days since the taxes were assessed.
Bankruptcy is a game of timing.  File a case one day too soon and the taxes are not discharged.  File a day later and all of the tax is discharged.  A wise bankruptcy attorney and an educated client will want to verify the assessment date of the income taxes owed by obtaining an Account Transcript for each year taxes are owed.  IRS Form 4506 provides a taxpayer with a free copy of their account transcripts.
To discharge income taxes in bankruptcy, a few rules need to be observed:

1. Only income taxes and taxes on gross receipts may be discharged.  Payroll taxes are not dischargeable in bankruptcy.
2. No Substitute Returns: The taxpayer must actually file the return to discharge the tax.  If the IRS files the return (sometimes called a SFR or “substitute for return”), the tax is not dischargeable.
3. Three-Year Rule: The taxes must have been due more than three years prior to filing bankruptcy.
4. Two-Year Rule: The tax return must have been filed more than two years before filing bankruptcy.  So, if you filed a return a few years after it was due, the return must be on file with the IRS for at least two years before it can be discharged.
5. 240-Day Rule:  The taxes must have been assessed more than 240 days prior to filing bankruptcy.  This rule comes into play when the IRS audits a tax return and assesses additional taxes or penalties.  So, if the IRS audits your return filed 5 years ago and assesses new taxes and penalties, you must wait another 240 days to file the bankruptcy.
6. Fraud & Tax Evasion: If a taxpayer may not discharge taxes when they commit tax fraud or if they willfully evade taxes.
7. Offer in Compromise:  If a taxpayer files an Offer in Compromise before the time rules above have expired, the above timelines are extended by the time an Offer in Compromise is pending plus 30 days.
8. Tax Liens:  As a general rule, bankruptcy cancels debts and not liens.  So, even though a tax may be old enough to discharge, the tax lien will remain on the taxpayer’s property despite receiving a bankruptcy discharge.  In Chapter 7 cases, the mixture of tax liens and assets with equity—regardless of whether an exemption law normally protects the asset—becomes lethal with the application of Bankruptcy Code Section 724(b).   The IRS is not subject to state exemption laws, and Section 724(b) gives the Chapter 7 Trustee special powers to liquidate assets if a tax lien is present.

Last weekend I watched the movie Larry Crowne, starring Tom Hanks and Julia Roberts.  In the movie, Tom Hanks plays a character that had recently been terminated for his job due to his lack of formal education, so he decided to go back to community college to remedy the situation.  He took an economics class there with an eccentric professor.  One day, the two of them were outside the school having a discussion on whether there were any economic benefits to filing for bankruptcy, I believe with Tom Hanks arguing that there were not and the professor arguing that there were.  Granted, this was not the focus of the film (and I haven’t known bankruptcy to be a topic discussed in economics classes – I didn’t discuss it in mine), but the professor was right.
Bankruptcy is not something that a person should strive for.  We all know that.  However, for the honest debtor who finds himself or herself in a truly difficult financial situation which is unanticipated, bankruptcy does operate as a “fresh start,” which is its stated goal.  What I generally mean by an “honest debtor” is a debtor who is not committing fraud by doing something like running up credit card debts in anticipation of bankruptcy, but that’s for another blog entry.  In this entry, I will be referring to consumer bankruptcy.
The most pervasive aspect of the fresh start is through the discharge under section 523.  A bankruptcy discharge simply relieves the debtor from any further personal liability for the debts covered by the discharge.  A bankruptcy discharge does not, however, eliminate the debts: the ability of creditors to look to other parties such as guarantors and insurers is unaffected.  And, a bankruptcy discharge does not eliminate liens: the ability of secured creditors to look to their collateral is unaffected.
There is also the automatic stay under section 362.  This means that from the moment you file for bankruptcy, your creditors cannot attempt to collect the debts that you owe them.  They cannot send you letters or call your phone (by the way, even if you don’t file for bankruptcy, creditors are required by law to obey you if you tell them to stop calling your cell phone at any time, though you can’t make them stop calling your home phone without the automatic stay).  They also cannot do things like terminate your utilities with the automatic stay protection.  A creditor can be held in contempt for violating the automatic stay.   
In certain situations, bankruptcy can also help a debtor’s credit score.  This is because individuals who file for bankruptcy in the first place typically have low credit scores in the first place, often with things like late payments and charged-off accounts.  When consumers receive the bankruptcy discharge, the items will be marked as included in a bankruptcy, rather than showing a high account balance, or otherwise being a bad debt.  To be certain, this is not always the case; in a generic sense, the bankruptcy filing, in and of itself, will lower a consumer’s credit score.  It is only the effect on the consumer’s other accounts that can sometimes improve a credit score.  I should also mention that bankruptcy discharge can only stay on a credit report for ten years. 
There is also plenty of free assistance for those who need it.  I spent my summer in 2011 working only on pro bono bankruptcy cases.  They were referred to us by Legal Services of Northern Virginia.  The individuals who received the pro bono assistance did not get the bankruptcy representation for absolutely nothing – they still had to pay small fees to, among other things, pull their credit reports.  They did not, however, have to pay several thousand dollars in fees, which is typical of a bankruptcy filing. 
Bankruptcy is not always a bad thing.  For the honest debtor who finds herself in a difficult economic situation, it can provide a fresh start, free of phone calls from creditors and personal liability for debts.  Though it is often expensive to hire a bankruptcy attorney, there are often programs (such as those in Northern Virginia) to provide assistance to those who cannot afford the attorney’s fees.  Based on the complexities of the bankruptcy code, though, it is probably not a good idea for most debtors to file bankruptcy pro se(without legal representation).
Thanks for reading.  I’ll be back with a new post within the next few weeks.
J.P. Morgan

Many couples or individuals, prior to deployment, try to get their personal matters in order.  During this very stressful time and period of adjustment the last thing any service member needs is to be worried about their financial status.  For many, however, this issue arises as life never goes according to plan. Considering bankruptcy - either Chapter 7 or Chapter 13 is a viable option for many soldiers.  Often I find prospective clients unsure if they should file for bankruptcy or not because they are preparing to deploy or their spouse is preparing to deploy.  It is important for you to remember that the military provides you with a power of attorney for a reason. We have had situations in our office where one spouse was about to deploy and wanted to leave knowing their financial matters were under control for his wife/husband. Using the power of attorney we were able to file the case and the spouse was able to sign the necessary documents and appear at the required 341 Meeting of Creditors on his behalf. This is not an unusual occurrence and it is one that the United States Trustee will allow.  The benefit of this is that you can continue to move forward on your bankruptcy when filing a Chapter 7 or a Chapter 13 if you are deploying and not have to be worried about the financial strain your family may be in.  Bankruptcy provides you and your family with a fresh start.