Can My Social Security Benefits Be Garnished or Levied From My Bank Account?

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The short answer is yes it is possible, but rare depending upon the circumstances. Your social security benefits are general exempted from garnishment and levy by normal creditors and possibly the state you live in. In California, the State of California does not levy on your social security benefits. Your creditors also cannot garnish your social security benefits or levy on your bank account that contains your social security benefits. A creditor can still sue you and obtain a judgment to enforce against you, but how will they enforce the judgment is the question.

The Internal Revenue Service Will and Can Absolutely Levy on Your Social Security Benefits

Please see 26 U.S.C. Section 6334(c) regarding property exempt from levy and the IRS’s ability to enforce unpaid taxes. Section 6334(c) provides reference to Section 207 of the Social Security Act. Section 207 provides: (a) The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. (b) No other provision of law, enacted before, on, or after the date of the enactment of this section, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section. (c) Nothing in this section shall be construed to prohibit withholding taxes from any benefit under this title, if such withholding is done pursuant to a request made in accordance with section 3402(p)(1) of the Internal Revenue Code of 1986 by the person entitled to such benefit or such person’s representative payee.

Section 3402(p)(1) more or less treats social security payments as payment made by an employer as wages, which can be garnished and levied on in a bank account. The path to garnishment or ability to levy by the Internal Revenue Services is a twisted one, but nonetheless, the IRS can garnish social security benefits and levy upon social security benefits held in a bank account under certain circumstances.

If Your Only Income is Social Security Benefits You are Generally Considered Judgment Proof

If you owe a debt that is unsecured, that means there is no collateral securing the repayment of the debt, a creditor will have to sue you in state court and obtain a judgment to force repayment of the debt incurred. If your only income is social security benefits and you do not own real property, a house or raw land, then the options to enforce the judgment are very limited. Thus, the term judgment proof is described for this situation. A creditor can obtain a judgment against you, but how can the judgment be enforced? If you seek the counsel of a bankruptcy attorney regarding your debts be sure to let them know your only income is from social security. This should come out during a standard consultation but you never know. Make sure they know.

Some People That are Judgment Proof Still Choose to File Bankruptcy and Discharge Their Eligible Debts

If you are behind on your payments to unsecured creditors you know that the phone calls start relatively quickly after missing a payment and the letters demanding payment start relatively quickly too. Every now and then we have a client come in with income that is only social security. We inform them that they are for the most part judgment proof as described above. Some choose to file bankruptcy and discharge their eligible unsecured debts and others do not. For most they just want to move on with life and not worry about debts hanging out there to worry about. Everyone is different though. It is truly up to you what you believe is right for you. Filing for bankruptcy protection should stop the harassing phone calls and letters in the mail. As soon as the bankruptcy case is filed the automatic stay becomes effective stopping any and all collection activity. Once you receive a discharge in your case your creditors are barred from attempting to collect on a discharge debt incurred prior to the date the bankruptcy case was filed. Every now and then a creditor attempts to collect a debt after discharge and they can be held in contempt of court and sanctioned for this impermissible behavior.

Can I Be Held Liable For Unpaid Sales Tax in California If I Am A Silent Partner?

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In California the State Board of Equalization collects sales tax from businesses and partnerships. But what if you are a silent partner that invested funds to start a business but do not participate in the day to day operation of the business? Why should you be personally liable for unpaid sales tax when you had nothing to do with not paying the sales tax to the BOE if and when the business unfortunately fails? Under California law and the Revised Uniform Partnership Act all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.” Cal. Corp. Code § 16306(a).

This issue was recently discussed and analyzed in a Ninth Circuit Bankruptcy Appellate Panel opinion, In re: Earnest Leal and Maria Leal; BAP No. CC-06-1207-MoDK. The debtors, Earnest and Maria Leal were silent partners in a retail shoe store. The Leal’s did not participate in the actually running of the shoe store and had no responsibility for collecting and paying sales tax. Their business partners, the Stanleys, actual ran the store and were responsible for the day to day operation of the shoe store. The lease for the shoe store was signed by both the Stanleys and Leals. Maria Leal and Ms. Stanley signed a Business License Tax Application that was filed with the City of Rancho Mirage. Retail is a tough business and apparently the Stanleys had to close the shoe store.

So, how does this land in bankruptcy court and the Ninth Circuit Bankruptcy Appellate Panel? Mr. and Mrs. Leal filed for bankruptcy under Chapter 7 of the Bankruptcy Code and did not list any debt owed to the Board of Equalization. Some of the creditors of the failed shoe store did see collection from Mr. and Mrs. Leal. There was at least one default judgment entered against Mrs. Leal and the Leals’ bankruptcy petition included debts resulting from the failed shoe store. Mr. and Mrs. Leal received their discharge and their Chapter 7 case was closed. Sometime after they received their discharge the Board of Equalization began collection activity against Mr. and Mrs. Leal for $20,000 in unpaid sales tax owed from the shoe store. The Leals’ bankruptcy attorney reopened their Chapter 7 case and filed a motion to determine the validity of the alleged sales tax debts and tax liens against the Leals. The bankruptcy court found that the Leals’ were not responsible for the sales taxes given they did not willfully fail to pay them and had no supervision over the business.

The resulting appeal provides the following analysis of the relevant California law regarding partnerships and liability for sales tax payments. Does California Revenue and Tax Code Section 6829 shield debtors from joint and several liability for unpaid sales tax? Section 6829 provides in relevant part: “upon termination, dissolution, or abandonment of a partnership . . . any officer, member, manager, partner, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation, partnership, limited liability partnership, or limited liability company in complying with any requirement of this part, shall be personally liable for any unpaid taxes and interest and penalties on those taxes, if the officer, member, manager, or other person willfully fails to pay or to cause to be paid any taxes due from the corporation, partnership, limited liability partnership, or limited liability company pursuant to this part.

The Leals’ bankruptcy attorney argues that the Leals cannot be personally liable for any unpaid taxes and interest given they were not charged with the responsibility of filing returns or payment of the taxes. They are just silent partners in the failed shoe store business. The Ninth Circuit Bankruptcy Appellate panel disagreed with the original bankruptcy court and held that Cal. Rev. & Tax Code section 6829 does not protect Debtors from any liability they may have as general partners under Cal. Corp. Code section 16306(a). So silent partners in California beware. Just because you are not part of the day to day operations of a partnership you invested in you can be liable for unpaid sales taxes if they are not paid timely.

Cars, Credit and Bad Car Loans

By Ryan C. Wood

A concern young people should have is establishing credit. How do you obtain credit? How do you build up your credit? Credit is a vicious cycle. In order to have good credit you need to have start getting a credit history in the first place. But a lot of lenders and creditors will not lend to you if you do not have any credit. In fact, no credit history is worse than having bad credit. How do you get around that?

Young people and other people trying to get their credit off the ground can use one of the most helpful ways of kick starting their credit score: the co-signer. If you do not have any credit and you want to buy a car you will either have to pay a high interest rate or the car lender may even deny you credit. But if you have a co-signer that has decent to great credit your interest rate may be significantly reduced depending on your co-signer’s credit score and history. The co-signer more or less is vouching for you. The co-signer is essentially saying that if you cannot pay for the loan the creditor may go after them to get the loan repaid. You need to be able to find someone that believes in you and trusts that you will be able to pay the debt back or their credit could be negatively impacted. So long as you continue to make those car payments on time your credit will slowly build. You will not have great credit overnight. Credit takes a long time to build and takes a lot of patience and good financial decisions to reach its height. Co-signers beware, you are taking a risk and need to understand that you could be on the hook for the co-signed loan.

What happens if you took a wrong turn and made some bad financial decisions? Say for example you go crazy with your credit cards and you do not have the money to pay it back? Or you were unable to get a co-signer on your car and had to pay over 20% interest for a car that is not worth the amount you paid? The good news is that it is not the end of the world. People make mistakes all the time. You can always start over. One of the biggest tools that can help you get that fresh start is bankruptcy. You should not be thinking of bankruptcy in the same vein of thinking about getting started on improving your credit. Bankruptcy should only be used if you made some mistakes that you cannot get out from under.

If you are considering bankruptcy due to your financial circumstances there are some advantages. If you were unable to get a co-signer for that car and ended up paying a high interest rate bankruptcy can help you. If your car is not worth how much you owe on the car (for example: you owe $15,000 for a car that has a blue book value of $5,000) you can redeem the car for the fair market value in a Chapter 7 bankruptcy. What does redeem mean? Redeem means you pay the lump sum amount of what the car is worth. So instead of paying back $15,000 for the car you only have to pay back $5,000. The caveat is that you have to pay the $5,000 in one lump sum payment. If you are unable to do that, there are companies out there that can help you redeem the car by providing you with a redemption loan. That is similar to a refinancing deal after your bankruptcy case is filed. You need to do the right calculations though to make sure the redemption loan is worth it and that you will be saving money in the long run.

Another idea if you cannot redeem the car and you do not want a redemption loan is to “cram down” the car in a Chapter 13 bankruptcy case. In a Chapter 13 cram down you also pay what the car is worth instead of what you owe on the car. You spread out the payments over 3 to 5 years depending on your financial circumstances and you can also reduce the interest rate to about the prime rate at the time you filed your bankruptcy rate + 1-3%. For example if the prime rate is 3.25% at the time you filed your bankruptcy case you may be able to pay only 4.25%-6.25% for the car for the term of the Chapter 13 plan. You can only do this if it is a purchase money security loan and you paid into the loan for more than 910 days (comes out to about two and a half years).

There are a lot of factors to determine if the bankruptcy option is right for you so it is always advisable to seek the services of an experienced bankruptcy attorney prior to making a final decision.

Are Substituted Tax Returns Considered a “Filed” Tax Return So That Unpaid Income Tax Can Be Discharged in Bankruptcy?

By Ryan C. Wood

In order for your tax debt to be dischargeable in bankruptcy you need to meet all these criteria: 1) the taxes need to be due more than three years ago, 2) filed at least two years prior to filing bankruptcy, 3) the taxes need to be assessed more than 240 days (8 months) ago, and 4) no filing of fraudulent returns or willful attempts to evade or defeat a tax. If you meet those 4 requirements, your unpaid income taxes can be dischargeable in your bankruptcy case. Today we are going to focus on Internal Revenue Service policies and whether a substituted tax return filed by a taxing authority on behalf of a taxpayer is considered a “filed” tax return to satisfy number two listed above.

What is a substituted tax return? A substitute for return (“SFR”) is a tax return the Internal Revenue Service (“IRS”) files on your behalf if you fail to do so. The IRS gathers all the information submitted to them (W-2s, 1099s, etc.) and the taxing authority prepares your return on your behalf. Keep in mind that the SFR is most likely not going to include all the deductions, exemptions, and credits that you may be entitled to so the tax assessment may be higher than what you actually owe. The IRS will send you a Notice of Deficiency and provide you with a proposed assessment and give you 90 days to file a return or a petition in Tax Court. If you do not respond the IRS will proceed with the assessment and for all intents and purposes the SFR will be considered a valid return for tax assessment and interest and penalties will accrue. Now just because the IRS filed an SFR for you does not mean that you cannot file your own tax return. In fact it is encouraged that you still file your own return because as indicated previously, the IRS does not take into account all the deductions, credits, and exemptions that you may be entitled to. By filing your own return you can reduce your tax liability if not eliminate it altogether. You may even be due a refund. If you do not file your return within 3 years of the date the return is due you risk losing your refund and your right to claim tax credits. Make sure your bankruptcy attorney or you obtain an account transcript from the IRS to verify your tax history and verify that a SFR was filed on your behalf.

Now that you know what a SFR is the next step is to determine if the SFR acts as a filed tax return if the IRS prepares the SFR. The short answer is a resounding NO! Please see IRS Chief Counsel Notice CC-2010-016 and Internal Revenue Code §6020(b). The SFR does not count as a filed return and therefore if you owe taxes pursuant to the SFR it is not dischargeable in bankruptcy. If you prepare and file your own tax return after a SFR was prepared by the IRS, taxes are assessed and file it with the IRS and meet all the criteria of a dischargeable tax debt, then only the portion of the tax that was not previously assessed would be dischargeable. If you end up owing no taxes or a decrease in taxes owed, those taxes would not be dischargeable.

After the IRS prepares a SFR and assesses taxes owed from the SFR you can still prepare and file your own tax return. Once you file your own tax return and if your unpaid income tax meets all the criteria for the taxes to be dischargeable, only the portion that was not previously assessed from the SFR would be dischargeable. If it turns out that you do not owe as much as the IRS claims, whatever amount remaining owed to the IRS from the taxes assessed by the SFR is not dischargeable.

For example:

Let’s look at an example to help you picture this rule. Let’s say you want to file for Chapter 7 bankruptcy in November 2014 and you ask your bankruptcy lawyer if your taxes are dischargeable. You owe taxes for the 2008 tax year but you never filed a tax return for this year and the IRS filed an SFR on your behalf and assessed the taxes in 2010 and the SFR indicated you owed $15,000 for the 2008 tax year. Even though you meet all the other criteria to have your taxes discharged, the $15,000 is not dischargeable because you did not technically file a return since SFRs do not count as a valid return. Now let’s say you immediately go to a CPA to file the 2008 tax return and you were assessed an additional $5,000. That $5,000 would be dischargeable in bankruptcy once it meets the other discharge rules. If the CPA helps you file the tax return and you end up lowering your tax liability from the $15,000 the IRS assessed from the SFR to only $3,000, your tax liability will only be $3,000. This is good news since you only owe $3,000 rather than $15,000, but the bad news is that the entire $3,000 is not dischargeable no matter how long you wait to file for bankruptcy.

The harsh effect of the SFR should encourage you to file your taxes on time in the event you know you are going to owe income taxes. Not filing a return and the Internal Revenue Service filing a substituted return could make any otherwise dischargeable income tax not dischargeable. So no, substituted tax returns are not considered a “filed” tax return so that unpaid income taxes can be discharged when filing bankruptcy.

What is a Hardship Discharge in a Chapter 13 Bankruptcy Case?

By Ryan C. Wood

If you are currently having problems making your Chapter 13 plan payments each month due to circumstances that you cannot control there may be some help for you. If you currently have a bankruptcy attorney you should seek his or her advice immediately before your case is dismissed for nonpayment. Most Chapter 13 trustees have a quick trigger finger when plan payments become delinquent. If you do not have a bankruptcy attorney you need to consult with one immediately to see what your options are. There are generally three main options if you are unable to make your Chapter 13 plan payments. The first one is to modify your Chapter 13 plan to a lower payment you can afford either temporarily or permanently depending upon the circumstances. Some Chapter 13 trustees will enter into a stipulation to repay the missed payments without filing a motion to modify and obtain court approval. Another option is to convert your case to a Chapter 7. The third option is to obtain a hardship discharge. All three of these options are dependent on court approval and would depend on your particular circumstances. Today we are going to discuss the hardship discharge.

Pursuant to 11 U.S.C. §1328(b), a hardship discharge is available for people that cannot modify their Chapter 13 plans in a practical manner and had circumstances come up that they could not be held accountable for that made them unable to continue their Chapter 13 plan payments. Additionally, they need to have paid into the plan not less than what they would have paid to their Chapter 7 creditors if their bankruptcy estate was liquidated. It is also important to note that the hardship discharge is only available to people whose Chapter 13 plan was confirmed or approved by the bankruptcy court. If your plan was not confirmed you are not eligible for the hardship discharge. See Toste v. Smedberg (In re Toste), BAP 9th Cir., 2014).

So what exactly does the hardship discharge cover? Does it discharge all your debts or only some of them? To truly understand the hardship discharge we need to know about what is dischargeable or not in a regular Chapter 7 bankruptcy and what is dischargeable in Chapter 13 bankruptcy cases. In a Chapter 7 bankruptcy your general unsecured debt is dischargeable unless it fits into a category under 11 U.S.C. §523(a). These are debts such as those incurred through false pretenses or fraud, priority tax debt, student loans, domestic support obligations, death or personal injury caused by operation of motor vehicle while driving under the influence, restitution, unscheduled debts, and much more. For a complete list you should review the exceptions to discharge under §523(a). Be sure to provide your bankruptcy attorney detailed information about how your debts and how they were incurred if there are any not so good circumstances.

Chapter 13 bankruptcy discharges are broader than Chapter 7 bankruptcy discharges. There are certain debts that are non-dischargeable under §523(a) that are dischargeable in a Chapter 13 case. Pursuant to 11 U.S.C. §1328(a), you are entitled to a full discharge of your debt except for the following debts: debts that provided for a cure for any defaults on any secured or unsecured debts (for example: if you were behind on your mortgage or car payments and the Chapter 13 plan provided for the cure amount), debts for priority taxes, student loans, money obtained by false pretenses or fraud, unscheduled debt, fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny, domestic support obligations, death or personal injury caused by person filing for bankruptcy who was driving under the influence. Additionally, debts for restitution included in the sentencing of a conviction of a crime or restitution awarded in a civil action against the person filing for bankruptcy as a result of willful or malicious injury that caused personal injury or death to someone is also non-dischargeable in a Chapter 13. Thus, if you successfully complete the Chapter 13 plan, the non-dischargeable debt in §523(a) other than the debts enumerated in the above paragraph will be dischargeable. Some issues pursuant to Section 523(a) may require an adversary proceeding to be filed to prove the grounds for a debt to be not discharged.

So what happens if you initially filed a Chapter 13 case but circumstances occurred where it was no longer feasible for you to continue making payments in your Chapter 13 plan? You can obtain the hardship discharge, but the discharge is narrower than the normal Chapter 13 bankruptcy case discharge if you complete the plan and receive a §1328(a) discharge given all of the regular §523(a) exceptions to discharge provisions apply. See Toste v. Smedberg (In re Toste), BAP 9th Cir., 2014). You can look at it as you are receiving a Chapter 7 discharge rather than a Chapter 13 discharge.