Filing bankruptcy is an important legal right. Here are some important bankruptcy facts you should know. The Constitution of the United States, Article I, Section 8, Clause 4, provides Congress with the power to establish uniform laws on the subject of Bankruptcies throughout the United States. That provision was included by our Founding Fathers in reaction to the "debtor’s prisons" of colonial times, in which individuals could be imprisoned for their debts. Since the year 1800 this country has had formal bankruptcy laws for the benefit of U.S. residents. Our current bankruptcy code was adopted in 1978, providing a major overhaul of the bankruptcy system. New legislation took effect October 17, 2005 which substantially revised the Bankruptcy Code again. However, most people in financial distress can still file for bankruptcy protection. For more information on filing bankruptcy visit www.flalawyer.com.

The Bankruptcy Code provides for six separate types of bankruptcy proceedings. Since Chapters 9 and 12 are available only to municipalities or family farmers, respectively, and Chapter 15 concerns foreign proceedings, they will not be discussed in this article.

Chapter 7 Bankruptcy

A Chapter 7 liquidation proceeding is available to individuals, partnerships, and corporations. The debtor is allowed to keep exempt assets. For individuals filing bankruptcy in Florida, the exemptions are primarily determined by Florida law. They include the debtor’s homestead, (subject to a cap of $136,875.00 in equity if owned less than 1215 days), a debtor’s interest, not to exceed $1,000.00 in a single motor vehicle, a debtor’s interest in any professionally prescribed health aids, monies paid into the Prepaid Post-Secondary Education Expense Trust Fund, and $1,000.00 per individual in miscellaneous personal property. For individuals who are not claiming a homestead exemption an additional $4,000.00 exemption for any personal property may be available. Certain other assets such as the cash surrender value of life insurance policies, annuity contracts, IRA’s and pension plans may be exempt also. All non-exempt assets must be turned over to the Chapter 7 trustee for liquidation and distribution to creditors or bought back from the trustee through a payment plan.

For individuals filing Chapter 7, most debts, including some tax obligations, are discharged (see discussion below). Some debts, including recent tax obligations, trust fund obligations, child support and alimony generally cannot be discharged. Other debts may not be discharged if the creditor can prove improper conduct on the part of the debtor. A creditor can be held in contempt and required to pay damages for attempting to collect a debt discharged in bankruptcy.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy, or "wage earner reorganization" is available only to individuals with regular income. It requires that the debtor file a plan providing for payment to creditors over a period of up to five years. The benefits of a Chapter 13 include the ability to reinstate a home mortgage that is in default, stop IRS collection efforts while payments are made, the ability to retain non-exempt real estate and personal assets, and a broader form of discharge.

Chapter 11 Bankruptcy

A Chapter 11 reorganization is available to individuals and businesses. Due to the higher court fees, reporting requirements and legal fees involved in a Chapter 11, it is only used by individuals with combined debts of over $1,000,000.00. However, it may provide individuals and businesses with an opportunity to reorganize their debts and make arrangements to pay all or a portion of the debts, or sell the business, while obtaining protection from creditors. A Chapter 11 generally provides more flexibility than a Chapter 13 reorganization for individuals.

Corporate Bankruptcy

Businesses in financial trouble can seek protection from creditors in Chapter 11 while a plan of reorganization is worked out. For small business a Chapter 11 bankruptcy filing allows the business to reorganize its debts and make arrangements to pay all or a portion of the debts while obtaining protection from creditors.

A small business Chapter 11 also may be used to sell the business as a going concern. In many cases a small business can continue in operation and jobs can be saved by selling the business as a going concern to a friendly group of investors.

If your business has suffered a temporary setback a Chapter 11 may give you the time you need to get caught up on bills. It also provides a forum to negotiate with all creditors in a setting favorable to the business.

Dischargeability of Taxes in Bankruptcy

Most individuals are unaware that they may be able to discharge some or all of their older income tax obligations in bankruptcy. Dischargeability of these taxes turns on the question whether or not they are "priority" claims. Tax obligations which are non-priority are dischargeable.

The Bankruptcy Code provides that taxes assessed by a governmental agency which are based on income (income taxes) lose their priority status when:

(a) the tax return, with all extensions, was due more than three years prior to filing for bankruptcy protection;

(b) a return was filed at least two years prior to the filing for bankruptcy relief;

(c) the tax obligation was assessed at least 240 days prior to filing; and

(d) the tax payer is not guilty of fraudulent conduct or tax evasion and has not signed an offer in compromise or other settlement agreement.

Certain penalties and interest may also be dischargeable. Penalties designed to compensate the agency for actual loss are non-dischargeable while those which are punitive in nature may lose priority and become dischargeable. Employment taxes are not dischargeable regardless of the age of the tax claims. This is true whether the obligation arose because the debtor was the employer or a responsible officer.

Bankruptcy protection also provides a means to stop IRS collection procedures for a period of time while payments are made. Bankruptcy Code § 362, which grants debtors automatic relief from collection activity, applies to the IRS in the same manner as other creditors. The period of relief depends on many factors, including whether the tax payer files for relief under Chapter 7, 11 or 13. Priority and non-priority taxes can be treated in a Chapter 11 or Chapter 13 plan and paid out over time. The bankruptcy stay remains in effect until the Plan is completed or the case dismissed. This may allow a business which has been seized by the IRS to re-open and operate under a Chapter 11 Plan without interference from the IRS or other creditors. The filing of a Chapter 7 stays all collection proceedings until the entry of a discharge or dismissal of the case.

For information on Chapters 7, 11 and 13 visit www.flalawyer.com.

This article is not intended as a substitute for competent legal or accounting representation, but merely as a guide to help you decide whether you need the services of a licensed attorney or CPA.