COLLECT

HANDLING BANKRUPTCY CASES TODAY:

What Government Collectors Need to Know

Jeffrey A. ScharfTaxing 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 non-dischargeable 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 TreasurerJames 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

• 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.

Return Filing Requirements

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 DailyGrind

Improving Recovery in Bankruptcy

Jeffrey ScharfTaxing 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

Is there abusiness

associated?

NEW CASES

SORTby Chapter

CHAPTER7 (No

assets)

CHAPTER7 assets

Are thereNonfilers?

Send Nonfilerletter

CHAPTER11

CHAPTER13

Update AR (court, case #, trustee name, chapter, filing date, claim date)

Add to Spreadsheet(AR data, plus attorney name, address & phone & trustee address & phone)

File EstimatedClaim?

Calendar prior tobar date, if one,or 6-12 months

D

File claimthroughCACS-G

Mail to Court

Updatespreadsheet withamount and date

filed

Calendar nextwork date, 9-12

months

Responsibleofficer

assessment?Responsible

officerassessment?

Calendar 6months (or until

discharge/dismissal)

Responsibleofficer

assessment?

Calendar nextwork date, 3

months

Check case onVCIS or PACER

D

A

Yes

No

No

Yes

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 rulesDo not write off debts that remain collectibleDebtor 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 ScharfTaxing Authority Consulting Services,

P.C.

Automatic Stay11 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 ClaimsOnly 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 fileLate claims (especially in Ch. 7)Estimated claimsAmended ClaimsAdministrative 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 ReorganizationCode 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 ratePay you over an exceeding long termPay you only token amounts with a

balloon paymentEven pay you in pennies

The Plan constitutes a contract

Plans of ReorganizationDon’t go silently into “that good

night”

Review Plans and File Objections

Ask and you shall receiveInterest rateTimely and regular paymentsDefault provisionsCarve outs for taxes from other plan requirements

YOU HAVE TO DEMAND…

TREAT ME RIGHT!!!!

REVIEWThere 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 ScharfTaxing Authority Consulting

Services, P.C.(703) 425-7751jeff@taxva.com

www.taxva.com