Chapter 7 bankruptcy is often referred to as “liquidation bankruptcy” because it allows individuals to completely discharge some portions of their debt, but only after certain assets have been liquidated. It is both the fastest and most common type of bankruptcy, and often allows debt to be discharged within three to five months of filing. However, before filing, there are some important factors to consider.

First, you should consider your current financial situation to determine eligibility. When filing for Chapter 7 bankruptcy, a variety of financial documents will be disclosed, including schedules of assets, liabilities, income, and expenditures, transcripts of tax returns, and a list of all owned property, among other information. As with any form of bankruptcy, individuals must also undergo credit counseling and provide a record of completion before filing.[1]

In addition, your income must either be below the median income of your state, or you must pass the Chapter 7 means test to be eligible for Chapter 7. The means test calculates whether an individual has enough disposable income, or income left over each month after expenses have been paid, to feasibly repay their debt. If the test determines there is not enough disposable income, you may qualify for Chapter 7 even with an income above your state’s median level.

Once eligibility has been determined, it’s important to consider the nature of the assets you currently own. Because Chapter 7 requires liquidation of certain assets, it is often best suited for those who either do not own lots of assets or otherwise high-value property that they do not wish to sell. Each state is permitted to set its own property exemption laws which determine how much property is exempt and thus protected from being sold to cover an individual’s debt. While exemptions vary by state, each state sets out a dollar limit, above which any property, or assets, may be sold to cover an individual’s debts. In Florida, you can exempt your owned home 100%. Additionally, you can generally keep things like your clothing, furniture, electronics, and your car (by either exempting it or reaffirming the car loan).

Once eligibility and property exemptions are considered, the filing process can begin. As soon as a petition for Chapter 7 is filed, the individual who filed is protected from most collections against them or their property. Each case is then assigned a trustee, who primarily handles the selling of any nonexempt assets or processing a no-asset bankruptcy.

In a typical Chapter 7 case, an individual’s debt will be discharged within 3 to 5 months. However, the debts discharged under Chapter 7 will be only “unsecured” debts, including credit card debt, personal loans, medical bills, and any other debt that is not secured by collateral. Secured debt, like mortgages, student loans, and car loans, will not be discharged under Chapter 7. It is also important to remember that Chapter 7 can negatively impact your credit score for up to 10 years if you don’t work to rehabilitate your credit score.

While a vast majority of Chapter 7 petitions result in a discharge of the individual’s debt, there are quite a few eligibility exceptions and other pre-filing considerations. Guidance from trusted legal counsel can be indispensable in determining your eligibility and whether Chapter 7 is the best step forward for you.

If you are interested in learning more about the Chapter 7 bankruptcy feel free to contact Savage Villoch Law, PLLC.

Sources:

[1] https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics

[2] https://www.nolo.com/legal-encyclopedia/chapter-7-bankruptcy-means-test-eligibility-29907.html

With another new year just around the corner, you may be thinking about financial planning as a part of your New Year’s resolutions. For those of you with a newborns or young children in the family, you may be thinking about opening a college savings plan. A 529 account can be a great way for parents and grandparents to start a college savings plan. Here’s some commonly asked questions about opening a 529 account.

Who can use a 529 savings plan?

529 accounts can be used to start college saving for any student or future student in your family, including yourself.

When should I start my college savings plan?

Obviously, the best thing you can do is to start saving right away. However, it is never too late to start a 529 account for you or a loved one planning on attending college or a higher education institution.

Is a 529 account the only college saving plan available?

No, you don’t have to open a 529 account to start saving for college. There are several other college saving options available. Each has it’s advantages and disadvantages and it may be wise to consult with a financial or tax adviser when finding a saving plan that fits your needs.

College savings plan or prepaid tuition plan?

Along with the traditional, 529 college savings plan, some state and private colleges offer prepaid tuition plan options. With prepaid tuition plans, you can purchase credits towards college and university tuitions and fees at current prices. Keep in mind that prepaid tuition plans are typically subject to requirements such as mandatory residency requirements and you can only apply your prepaid credits to approved colleges and/or universities. While a traditional college savings plan can be more flexible in terms of requirements and restrictions, it’s important to remember that, as with any investment, it is subject to loss-risks.

Investor Resources

If you’d like more details on 529 accounts and other college savings plans, check out the College Savings Plan Network for information and educational resources.

Once you understand how tax laws apply to your capital losses, you will quickly see the benefits of reporting them. You will be able to form strategies that actually take advantage of stock losses ahead of time. Once an investment starts to head south, you’ll be able to make the right decisions to mitigate that loss.

Stock Loss Deductions

There are two types of reportable stock loss deductions:

• Short term losses
  • stocks held for less than one year
• Long term losses
  • Stocks held for one year or longer

While short and long term losses mirror capital gains in how they are categorized, the two function very differently. With capital gains, taxes are assessed based on how long you held on to a particular stock before selling. Short term gains are taxed at regular levels while long term gains are taxed at a much lower rate.

Advantages of Stock Loss Deductions

There are many ways you can benefit from reporting stock loss deductions on your tax return. You can use loss deductions to off-set taxes owed on gains. You can even carry over loss deductions into future years. If you have no capital gains taxes to report, losses can be used to deduct from your regular income. While you’re not going to recoup the total amount of a loss, consider deductions as a sort of consolation prize. Eating a stock loss is never fun, but at least deductions make it a little bit easier of a pill to swallow.

Reporting Deductions

As with all deductions, there are limits to reporting stock loss. The IRS requires investors to follow specific rules when it comes to reporting your losses. These apply differently depending on what type of loss you are reporting… Remember when we said there were two types of capital losses? Well there are actually two more. While short and long term losses define the loss itself in terms of how long it was held, losses are actually divided into two additional categories:

• Realized losses
  • When an investment is sold at a price lower than the initial purchase
• Unrealized losses
  • When an investment is held even after its value has fallen under that of initial purchase

Both types of losses must be reported on your tax return, but only realized losses can be applied as a deductions.

Deduction Limits

There are limits to what, how often, and when you can apply loss deductions towards. Most investors use stock loss deductions to offset taxes on short term gains. Since you are taxed on short term gains at a higher rate than long term gains, it makes sense to apply everything available to minimizing tax owed on those gains. Stock loss deductions can also be used to offset your regular income taxes. While The IRS limits this to $3000 in income tax deductions for a given tax year, if you have reported losses for that year greater than that amount, they can be used to offset income tax each year until the amount expires.

Questions About Stock Loss Deductions?

This just provides a basic overview of stock losses, their tax advantages and limits. There are more limits that apply depending on the type of investment, the manner in which it is sold, and to whom the investment is sold. If you have more questions about reporting stock losses as potential deductions, it’s best to speak with a financial adviser, accountant or tax attorney. A tax attorney specializing in stock investment-loss recovery can be a great resource available to you.

403(b)

This investment plan option is typically available to employees of public education institutions, non-profits and religious organizations. It is what’s known as a tax-sheltered annuity (TSA) plan. Think of it as the non-profit version of a 401(k). With a 403(b), you can defer parts of your earnings to the designated annuity plan. Your employer may also offer options in which they contribute to it as well.

457(b)

This option is typically available to employees of state and local government agencies and non-profits. This type of plan is known as a deferred compensation plan. It allows you to put-off paying taxes on contributions to retirement savings until later years. Earnings made on retirement savings are also deferred.

Rules and Limits

With both retirement investing plans, there are rules and limits as to who is eligible, what plans are available to you, and how much can be contributed.

• Currently, both plans have contribution limits set at $18,000. However, this is subject to change year-to-year.
• Typically, employers select which plans you can choose from. They are usually a limited offering.

What You Need to Know about Retirement Investing

You need to choose a vendor and plan that suits your retirement investing goals. It’s also important to note that just because a plan is offered through your employer, it does not mean that the vendor has been vetted or endorsed by your employer. Before selecting any plan, make sure you research the vendors’ background and experience.

Resources

If you want to learn more about these retirement investing alternatives, read the SEC bulletin. If you want to learn more about protecting your investments, check out our blog for even more investing tips.

Corporate tax cuts still on the way?

Optimism has since waned. As Congress has struggled to keep pace with a constantly in-flux administration with an ever-shifting stance, it has proved difficult for legislators to nail down details. Neither Congress nor the White House has yet announced any definitive plans for deregulation or tax cuts. In fact, it seems there won’t be any definitive plans for some time. According to a Reuters report, the White House says a detailed tax plan shouldn’t be expected until September. This leaves little time for Congress to pass a tax reform bill for 2017. Meanwhile, there seems to be some debate has to the scope of the intended tax cuts. The Trump Administration is calling for extreme cuts – 15 percent from the current 35 percent – whereas most Republicans have a more moderate 20 percent in mind. Even still, there’s further debate among Republicans has to how tax cuts will affect the U.S. deficit.

Blessing in disguise?

Maybe it’s a good thing there are no definitive tax cut plans. The White House and Capitol Hill should work closely together on an appropriate tax reform. Massive corporate tax cuts would take a drastic toll on the budget deficit. Depending on the scope of businesses and industries that a 15 percent tax rate would cover, it could increase the deficit $2.4-$4 trillion over the course of a decade.

You may have heard that taxes are not discharged in bankruptcy. Tax debt, as “priority” debt, gets paid first before other creditors in bankruptcy. However, the Bankruptcy Code includes exceptions depending on the type and timing of the tax, and the bankruptcy chapter filed.Before knowing which taxes qualify for discharge, however, you must first understand which do not qualify under bankruptcy law. There are 7 types of taxes you cannot avoid paying:

• Taxes on a past due return not filed within three years (plus extensions) before filing bankruptcy.
• Taxes assessed within 240 days before filing bankruptcy.
• Assessable taxes not yet assessed.
• Taxes on a late tax return filed within two years of bankruptcy.
• Taxes on a fraudulent tax return or tax evasion.
• Tax returns filed by the IRS for a taxpayer.
• Customs duties for goods entering the country over a year.

All taxes that do not fall under any of the above categories may qualify for discharge in bankruptcy. A debtor may avoid paying taxes on the following:

• Federal income taxes if older than three years from when taxes assessed (240 days).
• Employment withholding taxes but only the employer’s contribution if otherwise qualified for discharge.
• Past due property taxes over a year.
• Excise taxes (estate, gift tax, sales, or fuel) on an un-filed return three years past due or on events occurring over three years before bankruptcy.
• Employment taxes on an un-filed return three years past due before bankruptcy but not on earned wages.
• IRS Tax liens for unpaid taxes.

The rules for discharging taxes in a Chapter 13 plan for debt payment over time differ from a Chapter 7. In Chapter 13 bankruptcy, some taxes and penalties on late filed tax returns and fraudulent tax returns may qualify for discharge. Bankruptcy Rules on tax debt relief are especially complicated. Therefore, consultation with a Tampa chapter 7 lawyer for your bankruptcy is crucial; contact us before you consider your bankruptcy options.