Bankruptcy Statistics – An infographic by the team at Bankruptcy Statistics

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<br /> <img src="http://www.sbkass.com/wp-content/uploads/2013/05/Bankruptcy-Infographic-Demographics-2010.png" width="540"></p> <p>Bankruptcy Statistics – An infographic by the team at <a href="http://sbkass.com">Bankruptcy Statistics</a></p> <p>

Fraud is an intentional deception or misrepresentation made for personal gain or so that another will act on the deception to his or her legal detriment.  Fraud is a dishonesty used to gain a calculated advantage.  Fraudulent behavior is illegal regardless of what type of fraud is committed.

Tax fraud is a serious allegation because it is a fraud committed against the government.  Tax fraud charges that can be levied against a taxpayer include, but are not limited to, failure to report income, filing tax returns that are inaccurate, false or incomplete, claiming deductions that do not apply, and hiding offshore funds.  Tax fraud can relate to business income tax, personal income tax, cigarette tax, property tax, and sales tax.

If convicted of tax fraud, you face severe consequences including criminal prosecution.  Tax fraud can include significant fines and even jail time.

As a result, your career could be on the line if you are faced with tax fraud.  Tax is a crime of moral turpitude.  Fraud necessarily requires the intent to deceive, which puts your moral character in question.  Current and future employers may question whether you are too much of a liability to employ.  In addition, your family and life in general could be in jeopardy if you are sentenced to jail.

If charged with tax fraud, it is important that you hire a tax lawyer.  You should not speak to anyone other than your lawyer about your tax case, because any information you give to anyone can be used against you in court.  Communications with lawyers are protected by the attorney-client privilege.

Similarly, employers can be charged with tax fraud.  Businesses and companies can face tax fraud charges for paying “under the table” wages or off the books, intentionally misclassifying workers as independent contractors, or for State Unemployment Tax Act (SUTA) dumping which involves creating companies to manipulate the tax system and improperly obtain a lower tax rate.

ESPN recently aired a special documentary on its 30 for 30 show called Broke.

 The documentary focused on professional athletes who make millions of dollars during their short careers, but lose it all a few years after retiring.

The rich professional athletes ended up going broke and filing for bankruptcy for many of the same reasons why some members of the general public end up losing all of their money.

Many debtors file for bankruptcy for reasons completely out of their control.  An unexpected illness, catastrophe, or loss of a job all reduce the amount of income an individual can bring in and the amount of debt an individual can repay.

However, there is a group of debtors who have made some financial mistakes that caused financial ruin.  Spending beyond your means, or purchasing what you want and not necessarily need are ways to lose large amounts of money, quickly.  This is particularly true in the American consumer culture, which emphasizes spending over saving.  Further, some debtors, including athletes, meet the wrong people who convince them to make unwise investments.

Where the general public and professional athletes differ, is that professional athletes generally make their money at a younger age.  Some athletes turn professional right out of high school, and the mere age of 18.  At this age, not many people understand the value of money.  Moreover, many professional athletes grew up without much money.  Once they turn professional, they can make $200,000 per week or even more.  With paychecks this large, there is a sense that money is not an object and paychecks will never stop coming, so money will never be an object.  The reality is that athletes are usually forced to retire before the age of 40, when most of us are just starting to ascend up the career ladder.

The more money you have, the more you can spend.  The consumer culture of spending is even more exaggerated at the professional athlete level.  They strive to buy more cars, more expensive cars, more homes, bigger homes, and more expensive jewelry.  Broke also showcased athletes supporting up to 16 friends and family members, baby’s mothers, and purchasing items to outdo their teammates.

Although the general public’s lives may be vastly different from the lives of professional athletes, we can learn from their mistakes.  Saving and planning can help ensure a comfortable financial life.

Even if debtors are living within their means, it is not enough to avoid financial difficulty.  It is necessary to save well.  Savings can help curb the effects of disasters beyond the debtors control like injury, sickness, or loss of a job.  Saving will necessarily ensure that the debtor does not overspend or consume all of their income.

The means test was created to prevent debtors from abusing the bankruptcy system.  Although bankruptcy is a public right, the legislature does not want people filing for bankruptcy that truly do not need to.  Bankruptcy is meant to give a fresh start to those who cannot and will not be able to pay their debts, not to help fraudsters avoid creditors, or to make it easier for people who really have the ability to pay off their debts.

Before the means test was created, bankruptcy filings were left to the discretion of the judge.  The judge would grant the bankruptcy if he or she felt the debtor was sincerely unable to pay their debts.  The judge would deny the bankruptcy if he or she felt that the debtor was able to pay their debts.  In New York, the law ensures that the right people file for bankruptcy by requiring the debtor to take the means test.

The test enables attorneys to view the financial situation of a debtor and determine whether or not the debtor will be able to file for bankruptcy before the debtor begins the legal process.  Thus, the debtor does not have to waste time going through the legal proceeding if they seek a qualified professional who can advise them on whether they meet the means test.

As of May 1, 2012, a debtor’s household income for the preceding six months is compared with the median income for a similar size family in New York.

Median incomes for New York are as follows: Family of 1: $47,381, Family of 2: $57,884, Family of 3: $69,066, and Family of 4: $83,775.

If the debtor’s average monthly income is less that the mean income for a similar size family in New York, the debtor is presumed eligible to file for Chapter 7 bankruptcy, which enables a debtor to have debt discharged, as opposed to creating a repayment plan under Chapter 13 bankruptcy.

It is possible to avoid the means test.  Debtors who make less than a certain amount of income are generally exempt from the means test because they generally do not make enough money to abuse the bankruptcy system.

If you are considering filing for bankruptcy, consult a qualified bankruptcy attorney in New York who can properly advise you on whether you would pass the means test to successfully file for bankruptcy.

Individuals incur debt in a variety of ways.  From loans to purchases to interest, debtors who file for bankruptcy tend to accumulate debt from several sources.  Cash advances from credit cards are an additional source of debt.

Generally, after a debtor files for Chapter 7 bankruptcy, the listed debt will be discharged.  However, cash advances can be a source of debt that will not be discharged in the event of bankruptcy.

The Bankruptcy Code states that any cash advance obtained within 70 days of the bankruptcy filing exceeding $875, is presumed not dischargeable in bankruptcy.  The dollar value may change, but the premise and reasoning remains the same.  Congress enacted the relevant provision of the Bankruptcy Code to prevent debtors from exploiting the bankruptcy system.

Bankruptcy was created to allow the honest debtor to get a fresh start.  Congress did not want debtors getting cash advances right before they file for bankruptcy.  The idea is that debtors should probably know that they are contemplating bankruptcy within 70 days of filing.   Knowing you are preparing for bankruptcy, you know that you cannot afford your debt so it would not be prudent to accumulate more debt that you know you cannot pay down.

If a debtor knew cash advances within 70 days were still dischargeable in bankruptcy, they could withdraw all the cash they want, never expecting to pay it back, and immediately have that debt discharged after filing for bankruptcy.  It is this sort of abuse of the system that Congress is trying to curb.

For cash advances taken out within 70 days of a bankruptcy filing, a creditor must file an adversary proceeding to have the debt declared nondischargable.  Filing requires certain fees.  As a result, if the cash advance is not particularly large, some creditors will not bother taking time and paying the fees in order to file an adversary proceeding.  Creditors can also seek to have their debt declared non-dischargeable if the debt was acquired under false pretenses, false representation or actual fraud, meaning the debtor had no intent to repay the debt.  The creditor may seek to prove this by showing that the debtor has not been using the credit card recently.  If any such factors exist, it is more likely that the creditor will take time filing documents in court to have its debt removed from discharge.

However, since creditors do have the option to challenge the discharge of cash advances, it is generally best practice to wait to file bankruptcy until after the 70 day period to prevent complications.

One very prominent bankruptcy myth is that only the lazy and poor file for bankruptcy.  This is an inaccurate statement.  Honest debtors who have fallen on hard times, for various reasons like sickness or loss of a job, file for bankruptcy to get a fresh start in their financial life.

Large and popular companies also file for bankruptcy, further dispelling the bankruptcy myth.  One of the latest companies to file for bankruptcy is Hart Schaffner Marx, the men’s suit designer.  The company is not a small, unknown brand.

Both presidential candidates, Barack Obama and Mitt Romney are customers of Hart Schaffner Marx. It would appear that there is no better publicity than presidential candidates wearing your designs.  Presidential campaigns are on a nationwide level and election coverage is seen by millions of viewers across the country.  This means a lot of eyes could have potentially been on Hart Schaffner Marx suits, which could have translated into a lot of revenue.

Nonetheless, the company recently filed for Chapter 11 bankruptcy for the second time since 2009.  Chapter 11 bankruptcy is the Chapter used for businesses whose debts substantially exceed its assets.

The company plans to auction the assets it does have.  Brand licensing company Authentic Brands Group is expected to begin the bidding.  If Authentic Brands Group successfully acquires Hart Schaffner Marx’s assets, it plans to license the brand to a new company that will hire Hart Schaffner Marx’s current employees.  This is good news for employees who do not want to suffer the same personal financial fate that their employer did.  Loss of a job is one of the leading causes of personal bankruptcy filings.

When a business files Chapter 11 bankruptcy, it may continue operating during its Chapter 11 case.  Hart Schaffner Marx has reportedly acquired $65 million in financing from one of its lenders, Salus Capital Partners, which is also one of Hart Schaffner Marx’s lenders, to allow Hart Schaffner Marx to keep its door open.

Chapter 13 bankruptcy can be used by debtors who are partially able to pay some creditors.  If the debtor is ready, willing, and able to pay creditors with extra money after his or her living expenses are paid, Chapter 13 provides a way for the debtor to restructure their loan agreements and start fresh making new payments under the revised plan, while keeping their property.

After the Chapter 13 bankruptcy plan is complete within the three to five year time period required, debt is discharged.  However, there are some exceptions.

Not all debt will be discharged under Chapter 13 bankruptcy plans.  Debt that will not be discharged are claims for child support and spousal support (alimony), educational loans, drunk driving liabilities, criminal fines and restitution obligations, certain obligations that are long-term in nature, like home mortgages that extend beyond the term of the plan, and any debts not provided for in a wage-earner plan.

Child support and spousal support is not discharged in bankruptcy because the benefit was never for the debtor; it belongs to the child or the spouse.  The 2005 revisions to the bankruptcy code explicitly made the collection of child support payment of the highest priority by specifically exempting it from Chapter 13 bankruptcy discharge.

Moreover, a Chapter 13 case may be dismissed if a debtor fails to make child support payments that become due after bankruptcy is filed.  If the failure to pay is not deemed by the court to be excusable, the bankruptcy will be closed.  A Chapter 13 bankruptcy must certify that the child support payment has been paid in full or that the Chapter 13 bankruptcy plan provides for repayment of the child support accrued before the filing.

The duty to pay child support if a bankruptcy is involved or not, is absolute.  The duty is not dependent on whether the custodial parent or law enforcement is actively pursuing payment.

Photo Credit: CubaGallery

When trying to pay off debt, many people turn to their retirement savings.  Some debtors cash out their 401(k) plans in an attempt to avoid bankruptcy.  Of course bankruptcy is not something any debtor strives for.  After all, bankruptcy can come with negative consequences.  Thus, debtors usually want to pay off debts and are willing to employ any means necessary to do so.  However, is it generally prudent to spend your hard earned savings trying to avoid bankruptcy?

If you spend your retirement savings on debts trying to avoid bankruptcy, you cannot get that money back.  If, in the worst case scenario, you spend your retirement savings trying to avoid bankruptcy, but you are unsuccessful paying enough debt down, you will likely still have to file for Chapter 7 or Chapter 13 bankruptcy.

As a result, you will be in a worse position than you were when you started off.  You will now have depleted your retirement savings and still have to deal with the adverse consequences of bankruptcy.

401(k) plans and other retirement savings are exempt from bankruptcy.  If a debtor files for bankruptcy before withdrawing retirement funds, the retirement funds are safe from the bankruptcy filing.  The debtor may have his or her debt discharged, and also maintain their retirement savings.  The debtor will not have to cash the retirement savings out to pay off creditors.

As a result, it is wise to consider keeping your retirement savings, even in the event of financial difficulty.  A Retirement savings is somewhat of a safety blanket since you always have the option of filing for bankruptcy while protecting certain assets like a 401(k) plan.

Every debtor should carefully consider the consequences of depleting retirement funds to pay off debts before making a decision.  The decision will depend on the specific financial situation for each debtor; there is no blanket rule.

If the debtor’s reasonable living expenses surpass their future anticipated income, and the debtor does not plan on making more money or spending less money, the debtor probably should not deplete a retirement savings to avoid bankruptcy.  With less money, there is little chance of ever paying off debt, thus bankruptcy may become necessary.

If you are an employee who receives a salary from your employer for your labor, you are subject to paying taxes and subject to tax audits.

A tax audit is the process where the IRS or some other state taxing agency reviews your tax return to determine whether the return depicted income, expenses and credits accurately.

The audit generally begins with a letter.  It may also begin with a phone call or other type of notice.  The notification may also include the specific records you will need to produce, as well as a request for an appointment.  You may also receive a list of records you will need to produce and a request for an appointment.

The IRS wants to verify that you have reported each source and amount of your income properly, and that you have ultimately paid the correct tax.  The IRS also wants proof of payments in the form of receipts or other verifications.  If any income or expense remains unsubstantiated due to your inability to provide sufficient document proof, the IRS would adjust the tax return to reflect this, which will result in a balance due, interest, and possibly a penalty fine.

Whether you are an individual or a business being audited, it is important to protect your legal rights.  You have the right to appeal an audit finding.  If you choose to do so, you should contact an experienced New York tax attorney.

The IRS tends to impose strict deadlines throughout the process.  An attorney can ensure you stay on track and meet all the IRS imposed requirements.

Tax litigation is also very complicated and different than general litigation.  The Tax Code is very dense.  If you are involved in tax litigation with a tax collection agency, it is extremely important to engage an attorney who is well versed in the tax laws, knows how to navigate the process, protect your legal rights and avoid unnecessary risks and liabilities.

Debtors file for bankruptcy to have debts discharged in order to have a fresh financial start.  The discharge prevents the debtor from having to re-pay debt that their financial future dictates that they will not be able to pay back.

However, not all debts are dischargeable under federal bankruptcy law.  When making the decision whether or not to file for bankruptcy, it is important to consider which debt will be discharged, and which debt the debtor will still be liable for even after filing for bankruptcy.

In general, the debts that cannot be discharged in most bankruptcies are some tax debts, debts to the government for fines and penalties, domestic support debts, debts incurred from property settlements in divorce, student loan debts, debts involving overpayment of benefits, personal injury debts due to drunk driving charges, debts owed to specific retirement plans that have tax advantages, debts for willful and malicious injuries to people or property, and certain Homeowner Association fee debts.

Debts that are handled fraudulently and maliciously are also not dischargeable if the creditor can prove the debtor had a fraudulent intent, and the creditor asks the court not to discharge the debt.

The nondischargeable debts listed above apply to Chapter 7, Chapter 11, and Chapter 12 bankruptcies.  Chapter 13 bankruptcies have fewer debts which are not dischargeable.  For example, debts involving malicious intent, tax debts, and debts accrued through property settlement in divorce are dischargeable.

Although Chapter 13 has more relaxed discharge rules, Chapter 13 bankruptcy is different from the other forms of bankruptcy.  When filing for Chapter 7 bankruptcy, debts are immediately dischargeable.  In real time, debts are generally discharged roughly four months after the bankruptcy is filed, after creditors have been given time to file exceptions to the dischargeability of the debt owed to them.  In Chapter 13 bankruptcy, the debtor and the creditors work out a repayment plan.  After the repayment plan is paid in full, which usually takes between three to five years, the debts are dischargeable under a Chapter 13 bankruptcy plan.

A debtor does not have to file for discharge.  The bankruptcy filing starts the process of dischargeability.  Creditors may file an objection to the discharge of its loan.  They must file an objection before the deadline.  The deadline is to ensure that a debtor’s bankruptcy does not drag out unnecessarily.  The court will deny dischargeability for reasons such as the debtor did not provide all necessary documents, the debtor fraudulently transferred property or concealed property, or the debts fall under the nondischargeable debts listed in the bankruptcy code.