Don’t File Bankruptcy (Now)

Timing is everything.

Hitting a round ball with a cylindrical bat is a matter of timing.

Bankruptcy practice is no different.  Picking when to file a client’s case may be as important as the decision to file or the choice of chapter.

As we approach year’s end, taxes pop to mind as a reason not to file now, but next year, even January 2nd.

Why?

Because if your client expects to owe income taxes for the current year, by waiting until the year is over, the taxes are a prepetition debt.

Not so important in a Chapter 7 where you aren’t going to be paying any debts through the case, but of great interest if you are considering Chapter 13.

In my experience, the IRS is at best lukewarm and at worst absolutely hostile to including in a plan the taxes for the year of filing.

You finesse that fight altogether if you wait a few weeks til the tax year ends.  There is no question that once the tax year is concluded, any taxes owed are pre petition.

So, as if your fact gathering goals with your client were not already overwhelming, you need to add another question to your arsenal:

Do you expect to owe taxes for this current tax year?

If the answer is yes, you must assess the size of the debt not yet due and whether it suggests a 13, or a delay in filing.

You might enjoy the advice for new bankruptcy lawyers offered by our chief judge Alan Jaroslavsky.

Explore the short tax year in bankruptcy for Chapter 7 and Chapter 11 cases.

Image courtesy of Brianna.