The betrothed beneficiaries of the good-humoredly titled “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (BAPCPA) were the large banks and credit card companies lobbying pays off to donate money. The up-to-date law likewise helps individuals with alimony and child support awards. But a third victor was your welcoming, backyard tax collector. In all-purpose, the BAPCPA makes bankruptcies more awkward and expensive. But it also exempts certain taxes that were previously dischargeable, and lengthens waiting periods before other taxes become dischargeable. In addition, overdue taxpayers are forthwith mandatory to file unfiled returns, to continue in compliance thenceforward, and to supply copies of returns to creditors and to the trustee. Notwithstanding, for some individuals, bankruptcy can still be useful in dealing with difficult tax debts.
Individual debtors ordinarily apply either Chapter 7 or Chapter 13. In Chapter 7, a trustee protects the interests of unsecured creditors. (Secured creditors are already protected by liens on the debtor’s assets.) Nonexempt assets, if any, are sold. Completely encumbered assets are ordinarily abandoned, subject to the liens. No payments from post-petition profits are necessary.
Chapter 13 is for people who can do monthly payments. A debtor can’t possess unsecured debts of more than $307,675, nor secured debts of more than $922,975. Payments are based on the debtor’s capacity to pay. The trustee makes distributions to the creditors in accordance with their priority under the Bankruptcy Code. For a Chapter 13 program to be confirmed, the payments must cover all priority debts in full. After the necessary payments, all dischargeable debts that remain unpaid are discharged. In the past, payments ran for as short as three years. But under the BAPCPA, selected debtors will be required to produce payments for five years. Worsened still, the computation of the ability to pay will immediately be based on the IRS’s standards for permissible living expenses. (Therefore, scores of bankruptcy lawyers who never earlier thought about taxes or IRS procedures are now receiving a crash course in “IRS Law.”)
Prior to the BAPCPA, Chapter 11 was rarely used by people, but was mostly for businesses seeking to “regroup” their debts. A Chapter 11 is more involved and costly than a Chapter 7 or Chapter 13. But after the BAPCPA, there will be debtors who can’t utilise Chapter 7, but who owe too much for a Chapter 13. These poor souls might have to use Chapter 11, with the attendant difficultly, holdup and expense.