COLLECT
HANDLING BANKRUPTCY
CASES TODAY:
What Government
Collectors Need to
Know
Jeffrey A. Scharf
Taxing Authority Consulting Services, P.C.
Several Factors to Consider
• The Bankruptcy Abuse Prevention and
Consumer Protection Act (BAPCPA) of
2005
– Championed primarily by commercial creditors
to limit what they saw as rampant abuses of
the discharge provisions of the law.
– Effective as to bankruptcies filed on or after
October 17, 2005 so there are still some cases
in the system operating under the old laws
• The Daily Grind
• “It’s the economy stupid!”
(with apologies to James Carville)
What Did it do ?
• Many provisions affecting the handling
of bankruptcy cases by governments
were enacted
• Some of the new requirements for
debtors include:
– mandatory credit counseling
– “means test”
• determine debtor’s ability to repay their debts
• Based on median income and expenses for
the State
• It “means” you aren’t as bad off as
you thought….
What Did it do ?
• The net result of these requirements
was to force more debtors into
Chapter 13 payment plans.
• This actually may delay collections for
governments as otherwise nondischargeable debt is paid over time
rather than becoming subject to
administrative collection upon the
grant of a Chapter 7 discharge.
Good News/Bad News
• Most of these changes did not have any
major impact on the day to day operations
of the government collector
– Even with regard to handling new bankruptcy
cases
• They did, however, impact how the
government claim will be treated and paid
• Bankruptcies are like shopping for your wife’s
birthday…
Way too many possibilities and few of them are
likely to be right…
Even the choices that may have been
appropriate the last time around!
Dallas Parker, Deputy Treasurer
James City County, Virginia
THE NEW PROVISIONS
How They Are
Working in Practice
and Other Things
Government
Officials Might Want
to Know
Designation of Address
• The law provides the ability for tax creditors to
designate a particular address for bankruptcy
filings. If you do not designate an address, the
debtor may use any address that is valid for
the filing of returns or to contest an
assessment. §505(b)(1)(A)
• The Code also permits a government entity to
file a notice to be effective with all Bankruptcy
Courts to receive notifications of all cases filed
under Chapter 7 or Chapter 13 in which the
taxing authority is a creditor. §342(f).
• It is still not clear how this notification
requirement is playing out.
– Register at www.ncrsuscourts.com
Termination of Automatic
Stay
• A debtor that files a case after having one
dismissed in the last year is only granted a 30
day stay of action by creditors unless the court
grants the debtor additional time.
• If the debtor has had two or more cases
dismissed in the last year (either filed singly or
jointly), the automatic stay does not apply at all.
§362(c)(3)(A)-(4)(A).
• Debtors in these situations are typically filing a
Motion to Extend/Implement the Stay along with
their petition
• Creditors seem unwilling to take action and
risk violating the stay without a
determination by the court that the
stay is not in effect
Return Filing Requirements
• Chapter 13 debtors are required to file all tax
returns for the past 4 years by §341 meeting.
– If they fail to do so, the court can convert the case to
chapter 7 or dismiss it. §1308(a).
– The filing of all tax returns is also required for
Chapter 13 plan confirmation. §1325(a)(9)
• A taxing entity can request the court to convert
or dismiss the case for the failure of a debtor to
file a post-petition return.
• If the return is not filed within 90 days after
motion the court MUST convert or dismiss the
case. §521(j).
• The US Trustee or Chapter 13 Trustee may
be able to help.
Priority Taxes
• In computing the time limits for
determination of priority taxes,
the time is suspended for any
time in which collection was
suspended or which the
automatic stay was in effect,
plus an additional 90
days. §507(a).
Chapter 11 Payment
Requirements
• Plan payments in Chapter 11 cases
must be made within 5 years of the
bankruptcy filing date.
• This payment requirement also
extends to secured claims that would
also be qualified as priority claims if
they were not otherwise secured.
• Debtors must make regular payments.
This section originally read “regular
and equal” to avoid mere token
payments with a large balloon
payment to be made years later. The
“equal” language was dropped and
courts have already allowed some
creative payment schemes.
§1129(a)(9)(C).
Discharge in Chapter 13
• There is no longer a super discharge in
Chapter 13 cases.
– Included all debts not paid through the plan
• Debts that are discharged are treated as
they would be in a Chapter 7 case.
• This closes the loophole that permitted
the discharge of liability for unfiled, late
filed and fraudulent tax returns.
§1328(a)(2).
• This change also establishes that
responsible officer assessments
for trust fund liabilities are also not
discharged.
BAPCPA Summary
• Substantial changes made to
substantive bankruptcy law
• No real day-to-day effect on
handling new bankruptcies
• Changes to (among others):
– Automatic Stay
– Plan Requirements
– Discharge Provisions
The Daily
Grind
Improving Recovery in
Bankruptcy
Jeffrey Scharf
Taxing Authority Consulting Services,
P.C.
Citizen says:
“I filed bankruptcy”
•
•
•
•
Where did you file? Which court?
What’s your case number?
Who’s your attorney?
Easy to Verify
– VCIS
• Case No.
• SSN
• Name
– PACER
Develop a Process
• Create a methodology to
approach bankruptcy case
– Coding Accounts
– Preparing Claims
– Tracking and Review
• Use flowcharts, worksheets and
other documented tools
– This is tricky stuff
• Claim Filing
• Discharge
A
NEW CASES
Update AR
(court, case #, trustee name, chapter, filing date, claim date)
Add to Spreadsheet
(AR data, plus attorney name, address & phone & trustee address & phone)
SORT
by Chapter
CHAPTER
7 (No
assets)
CHAPTER
7 assets
CHAPTER
11
Are there
Nonfilers?
Calendar 6
months (or until
discharge/
dismissal)
Is there a
business
associated?
No
No
D
Yes
Send Nonfiler
letter
File claim
through
CACS-G
Yes
Mail to Court
Responsible
officer
assessment?
Calendar prior to
bar date, if one,
or 6-12 months
Update
spreadsheet with
amount and date
filed
Responsible
officer
assessment?
Check case on
VCIS or PACER
Responsible
officer
assessment?
File Estimated
Claim?
Calendar next
work date, 9-12
months
Calendar next
work date, 3
months
D
CHAPTER
13
Pre-petition debts vs.
Post-petition Debt
• Bankruptcy only protects a Debtor from
Pre-petition debts
– Debts incurred before bankruptcy is file
• Does not protect debtor on post-petition
debt
– To be paid in the ordinary course of
business
– Failure to pay post-petition obligations may
be grounds for conversion/dismissal of
case
Citizen says: ”I filed
bankruptcy and got a
discharge….you can’t collect”
• Do you have a copy of the discharge entered
by the court?
• Take a look at it:
– It says: “The debtor is granted a discharge”
“SEE THE BACK OF THIS ORDER FOR
IMPORTANT INFORMATION”
Citizen says: “I filed
bankruptcy and got a
discharge….you can’t collect”
• Do you have a copy of the discharge entered
by the court?
• Take a look at it:
– It says: “The debtor is granted a discharge”
“SEE THE BACK OF THIS ORDER FOR
IMPORTANT INFORAMATION”
• Now flip it over and take a look at the back:
– It says “Debts that are not discharged”
• Debts for most taxes
• Debts for fines, penalties and criminal restitution
• Debts not properly listed
Once they are
discharged, let them
know what is still due…
Know the substantive discharge rules
Do not write off debts that remain
collectible
Debtor even more likely to pay them
now that many other debts have
actually been discharged
No court determination required
Effect on Statute of Limitations
Immediately inform the taxpayer
It’s the Economy
Stupid!!!!
A Few Things To Do To
Improve Recovery in
Bankruptcy
Jeffrey Scharf
Taxing Authority Consulting Services,
P.C.
Automatic Stay
11 U.S.C. §362 Automatic Stay (in part)
(a) Except as provided in subsection (b) of this
section, a petition filed under…this
title…operates as a stay…
(b) The filing of a petition under…this title…, does
not operate as a stay—
(9) under subsection (a), of—
(A) an audit by a governmental unit to
determine tax liability;
(B) the issuance to the debtor by a
governmental unit of a notice of tax deficiency;
(C) a demand for tax returns; or
(D) the making of an assessment for any
tax and issuance of a notice and demand for
payment of such an assessment…
Exceptions to the Stay
• Exceptions are still in existence to permit:
– Criminal actions §362(b)(1)
• Police and regulatory powers
• Including where the goal is restitution
– An audit by a government unit §362(b)(9)(A)
– A demand for tax returns, §362(b)(9)(C)
– Making an assessment; and issuing a notice and
demand for payment, §362(b)(9)(D)
– Setoff of income tax refunds, §362(b)(26)
• Effectiveness of the Stay (only as to debtor)
– Jointly liable/assessed parties
– Responsible officer assessments
Responsible Officer
Assessments
§ 58.1-3906. Liability of corporate officer or
employee, or member or employee of
partnership or limited liability company, for
failure to pay certain local taxes. (in part)
A. Any corporate, partnership or limited liability
company officer who willfully fails to pay,
collect, or truthfully account for and pay over
any local admission, transient occupancy, food
and beverage, or daily rental property tax
administered by the commissioner of revenue
or other authorized officer, or willfully attempts
in any manner to evade or defeat any such tax
or the payment thereof, shall, in addition to
other penalties provided by law, be liable for a
penalty of the amount of the tax evaded or not
paid, collected, or accounted for and paid over,
to be assessed and collected in the same
manner as such taxes are assessed and
collected.
Responsible Officer
Assessments
The automatic stay only applies to
the debtor.
Some Tax liability (trust taxes?)
can be immediately assessed
against the responsible officer and
collection action taken.
Provides leverage in the
bankruptcy case.
Filing Claims
§ 502. Allowance of claims
or interests (in part)
(a) A claim or interest, proof
of which is filed under section
501 of this title, is deemed
allowed, unless a party in
interest, including a
creditor…objects.
Filing Claims
Only way to assert a debt is owed against the
bankruptcy estate
Understand the claim filing rules
Understand the effect of a lien in your
jurisdiction and assert your secured rights
For taxes, these are quite cumbersome, and are
dependent upon such factors as tax year, tax
type, due date, and can even result in different
treatments for taxes vs. tax penalties
Allowed unless objected to
Always file
Late claims (especially in Ch. 7)
Estimated claims
Amended Claims
Administrative Claims (monitor the case)
Plans of Reorganization
§ 1129. Confirmation of plan (in part)
(a) The court shall confirm a plan only if all of the
following requirements are met:
(1) The plan complies with the applicable provisions
of this title.
(9) Except to the extent that the holder of a
particular claim has agreed to a different
treatment of such claim, the plan provides
(C) with respect to a claim of a kind specified in
§507 (a)(8) …regular installment payments in cash—
(i) of a total value, as of the effective
date of the plan, equal to the allowed amount of
such claim;
(ii) over a period ending not later than 5
years after the date of the order for relief…; and
(iii) in a manner not less favorable than
the most favored nonpriority unsecured claim
provided for by the plan…
Plans of Reorganization
§ 1322. Contents of plan (in
part)
(a) The plan shall—
(1) provide for the submission of all or
such portion of future earnings or
other future income of the debtor to
the supervision and control of the
trustee as is necessary for the
execution of the plan;
(2) provide for the full payment, in
deferred cash payments, of all claims
entitled to priority under section 507
of this title, unless the holder
of a particular claim agrees
to a different treatment of
such claim;
Plans of Reorganization
Code requirements for Plan language
are all “unless otherwise agreed”
You are deemed to have agreed by
silence
If you don’t object the debtor can:
Lower the interest rate
Pay you over an exceeding long
term
Pay you only token amounts with a
balloon payment
Even pay you in pennies
The Plan constitutes a contract
Plans of Reorganization
Don’t go silently into “that good
night”
Review Plans and File Objections
Ask and you shall receive
Interest rate
Timely and regular payments
Default provisions
Carve outs for taxes from other
plan requirements
YOU HAVE TO DEMAND…
TREAT ME RIGHT!!!!
REVIEW
There are several ways to get
additional revenue out of the
bankruptcy process
You need to have someone with
knowledge of the substantive
laws able to follow the case step
by step and jump through the
“hoops”
Always file and defend your claims
Participate, because it’s the
squeaky wheel that gets the
grease
SO GO AHEAD AND
SQUEAK!!
Jeffrey Scharf
Taxing Authority Consulting
Services, P.C.
(703) 425-7751
jeff@taxva.com
www.taxva.com