Good advice : what you need to know about the Bankruptcy Act of 2005

California CPA, June, 2005 by Jay Crom

The recent passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is the culmination of more than a decade of bankruptcy reform debate in Congress. For CPAs, the act means they may find that their financially challenged clients will have an increasing need for timely tax advisory and preparation services.

Further, tax return information now can have a greater impact on future payments that are required by a debtor who files for bankruptcy protection, as it will be used to evaluate future income and expenses.

While much of the discussion on the new act has centered on the more stringent requirements on individuals to qualify for relief, the legislation impacts a wide range of bankruptcy provisions beyond the consumer and individual tax issues discussed here.

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A summary of changes under the act can be viewed at http://thomas.loc.gov/cgi-bin/bdquery/z?d109:SN00256:@@@L&summ2=m&.

CHAPTERS 7,11,12 AND 13

The Bankruptcy Code, Title 11 of the United States Code, contains alternative paths for individual bankruptcy proceedings.

Under the new act, far fewer debtors will qualify for Chapter 7 liquidations after Oct. 16, 2005, when the act takes effect. Many more individuals will have to avail themselves of the Chapter 13 repayment plan route and more high-income debtors with assets or debt exceeding the Chapter 13 limitations will be pushed toward the Chapter 11 plan of reorganization. Eligibility for filing under the Chapter 12 farmer and fisherman repayment plan provisions has been expanded.

The act also prohibits an individual debtor from filing a petition under federal bankruptcy law unless the individual has received a briefing from an approved nonprofit budget and credit counseling service.

INCREASED EMPHASIS ON TAX RETURNS

The act expands a debtor's duties to file the following documents with the bankruptcy court: federal tax returns; evidence of employer payments received; monthly net income projections; and anticipated income or expenditure increases.

The act requires dismissal of a Chapter 7 or Chapter 13 case upon a debtor's failure to provide to the bankruptcy trustee--within seven days before the initial date of the first meeting of creditors--a tax return for the latest taxable period prior to filing, unless the debtor demonstrates that the failure is due to circumstances beyond the debtor's control.

This increased emphasis on tax returns means CPAs need to be extra vigilant in meeting deadlines and providing timely returns to their debtor clients.

At the request of the court or any interested party, the debtor shall file with the court, when filed with the taxing authority, a copy of each federal income tax return or, at the election of the debtor, a transcript of such tax returns for each tax year ending while the case is pending. This also holds for each year that had not been filed as of the date of the commencement of the case and was subsequently filed for any tax year ending in the three-year period ending on the date of the commencement of the case; and for amendment to any federal income tax return.

Failure to provide such information may lead to dismissal of the case.

The information contained in the pre-petition return may impact the amount of repayment required under a plan and may impact whether the plan's duration is three or five years.

The act conditions court confirmation of a Chapter 13 bankruptcy plan when the debtor files all pre-petition tax returns, as well as--before the day the first meeting of the creditors is convened--all tax returns for taxable periods ending in the four-year period that ends on the date of the filing of the petition.

If a debtor fails to meet these deadlines, the act directs the court to dismiss the Chapter 13 plan or convert it to Chapter 7, whichever is in the best interests of the creditors and the estate.

For Chapter 11 post-petition disclosure and solicitation purposes, the debtor must discuss the potential material federal and state tax consequences of the plan to the debtor and to a hypothetical investor that is representative of the holders of claims or interests in the case.

The act permits a taxing authority to petition the court to convert or dismiss a case, whichever is in the best interests of creditors and the estate, if the debtor fails to timely file a tax return or obtain an extension.

The act also prohibits a court from granting a discharge in a Chapter 7 case, or from confirming a reorganization plan in a Chapter 11 or Chapter 13 case, unless requested tax documents have been provided to the court.

NON-DISCHARGEABLE CLAIMS

Title VII of the act contains numerous bankruptcy tax provisions that impact the administration, priority and dischargeability of tax claims.

A significant benefit of filing for bankruptcy is the ability to discharge some or all of the debtor's debts or claims. A debtor remains liable for non-dischargeable claims even after the successful fulfillment and closing of a bankruptcy case.