How Do Death & Taxes Affect My Maple Grove MN Bankruptcy?

Posted by William Kain on April 14, 2016 at 1:37 PM
William Kain

death_taxes_maple_grove_mn_bankruptcy.pngBenjamin Franklin famously wrote “in this world nothing can be said to be certain, except death and taxes.” And death and taxes can add layers of complications to debt problems - and create issues for a person who is thinking about filing a bankruptcy case. Let’s take a closer look at the only two certainties in life.

Maple Grove MN Bankruptcy & Death

In my Bankruptcy Law Firm in Maple Grove, MN some of my clients come to me because of the death of someone close to them. A spouse suddenly dying can add a level of financial stress to the surviving spouse on top of the grief that spouse feels. Many couples need two incomes to survive financially; when one of the spouses dies - and particularly when the spouse with higher income dies - the surviving spouse can be looking at significant household budget problems. Often individuals die without life insurance, or with small amounts of life insurance. Living expenses and jointly-held debt - mortgages, car payments, credit card bills - that used to be paid with two incomes now have to be paid with one income. If there are minor children surviving, the children’s needs and expenses now also must be paid out of one, not two wages. Additionally, there is also the expense related to the deceased spouse’s last illness, injury or accident, as well as funeral expenses.

With an unexpected death, the financial burdens that follow the loss of the deceased spouse’s income can become crushing. If this happens, it is perfectly appropriate for a surviving spouse to discuss the options available - and that includes filing a Maple Grove MN Bankruptcy case. In a previous blog, I wrote that bankruptcy is a social insurance program. In the context of the death of an individual who leaves behind significant debt obligations, bankruptcy serves as a life insurance substitute. A bankruptcy discharge can serve to remove pre-existing unsecured debt as well as discharge the debt owed for the last illness or accident. Bankruptcy can help stabilize the finances of the newly-widowed person, so the widow is better able to provide for his or her family based on the new, reduced income.So unexpected death can lead to the surviving spouse filing a bankruptcy case when an individual dies unexpectedly, and at a young age. But there are also older people who are concerned that when they die, their heirs will inherit the debt that they are obligated to pay. It is a common anxiety.

For the most part, individuals who worry that their heirs - spouse, children and grandchildren - will be obligated to pay the account balances owed by the deceased person need not worry. The heirs of a person who dies while owing creditors money are not legally responsible for payment of those debts, typically. The deceased person’s estate will owe the debt, but not that person’s survivors. The exception to this rule is that spouses are responsible for the other spouses’s medical debts. So heirs will not have to reach into their own pockets to pay the debts of a deceased relative. However, that relative’s property and cash, rather than passing through to the heirs in a probate proceeding, will be used to pay debt. I have several clients who made the decision to file a bankruptcy case so that their estate will be preserved - that their home need not be sold to pay off creditors or their vehicles and investments cashed in. Bankruptcy can be seen as a tool to be used to preserve the estate of an individual for that individual’s children and grandchildren. Although it is not common, occasionally a person who has a Maple Grove MN Bankruptcy case pending will pass away. Under this circumstance, what happens to the bankruptcy case the now-deceased person filed? The answer depends on the chapter the deceased individual was in. 

Chapter 7 Bankruptcy

If a chapter 7 debtor dies before the bankruptcy case is completed, normally that individual receives a discharge, even if that individual is not alive at the time the discharge is entered. Since a chapter 7 debtor does not need to make payments in a bankruptcy case, the case does not need the debtor’s active participation in order to be completed. One issue that comes up in this context, though, is when the bankruptcy debtor dies prior to completing the required personal financial management course. The bankruptcy code requires the completion of the course before and individual can receive a bankruptcy discharge. However, there is an exception to this rule when a debtor is “unavailable.” Minnesota Bankruptcy Courts have held that the personal financial management course requirement can be waived when a chapter 7 debtor has passed away - that a deceased individual easily meets the definition of an unavailable debtor for purposes of the bankruptcy code.

Chapter 13 Bankruptcy

The treatment of debtors who pass away while a chapter 13 case is pending is different than that of the deceased chapter 7 debtor. Unlike the chapter 7 debtor, the chapter 13 debtor takes an active role in repaying that debtor’s creditors. So the death of a chapter 13 debtor usually results in one of three outcomes. First, and most commonly, the chapter 13 case is usually dismissed. The chapter 13 debtor is no longer available to make payments. The monthly payment is the heart and soul of a chapter 13, and now it isn’t being made. Once the chapter 13 trustee is notified of a debtor’s death, the trustee will usually bring the motion to dismiss the chapter 13 case. But that isn’t the only possible outcome. Under some circumstances, the deceased person’s survivors can petition the bankruptcy court for the entry of a hardship discharge. To receive a hardship discharge, the survivors must show that the deceased individual’s failure to complete plan payments is due to circumstances for which the debtor should not justly be held accountable, that the debtor’s unsecured creditors have already received as much money as they would if the debtor had filed a chapter 7 case, and that plan modification is not practical. The last option is to have the chapter 13 debtor’s survivors simply continue to make the plan payments until the plan payments have been made in full. At the end of the plan, the deceased debtor will receive a discharge. The advantage to survivors of having the deceased debtor receive a discharge is that the deceased debtor’s estate will not be liable to pay the deceased debtor’s debts.

One last “death issue” has to do with a person in a Maple Grove MN Bankruptcy case who becomes entitled to inherit money. One of the fundamentals of bankruptcy law is that a bankruptcy estate is created when a person files a bankruptcy case. The definition of the bankruptcy estate is found in section 541 of the Bankruptcy Code, and it’s a lengthy section. But for our purposes, it’s enough to know that the bankruptcy estate is composed of “all legal and equitable interests of the debtor in property as of the commencement of the case.” In other words, the bankruptcy estate is made up of all of the property the bankruptcy debtor owns at the time the bankruptcy case is filed and all of the property the bankruptcy debtor is entitled to (think unreceived tax refunds or unpaid, already-earned wages). That’s simple enough. However, there’s an exception to this rule - and that is that property of the estate also includes money or property inherited by a bankruptcy debtor provided that the person the debtor inherits from dies no more than 180 days after the chapter 7 bankruptcy case is filed.. To be clear, it’s the death of the person, not the receipt of inherited money or property that creates the inclusion of the inheritance in the bankruptcy estate.

So for the bankruptcy debtor who has a relative of close friend die within six months of the case being filed needs to be aware of the inheritance rule. The 180 day rule applies for chapter 7 cases. Money or property inherited by a chapter 13 debtor at any time while the debtor is in a chapter 13 bankruptcy becomes property of the bankruptcy estate. Since chapter 13 bankruptcy plans must be paid for a minimum of 36 months, up to a maximum of 60 months, the inheritance rule is in effect for a much longer time than in a chapter 7 bankruptcy. The chapter 13 debtor will normally have to turn over at least part of the inheritance to the chapter 13 trustee for payment to the debtor’s creditors.

In both chapter 7 and chapter 13 cases, if the bankruptcy debtor has the ability to exempt at least part of the amount inherited, the debtor does not have to turn over all of the money inherited. The inheritance can only be exempted if the bankruptcy debtor is using the Federal Bankruptcy Code to exempt the property of the bankruptcy estate. These debtor’s can use the unused portion of the “wild card” exemption (currently $13,100, maximum) to retain at least a portion of the inheritance. If a bankruptcy debtor elects to exempt their property under non-bankruptcy law, then the entire inheritance is non-exempt and must be completely turned over to the chapter 7 or chapter 13 trustee.
So as you can see, the death of a spouse, loved one or friend can cause financial stress or exacerbate already-existing financial problems. A bankruptcy filing can be a useful tool to resolve the debt issues that accompany an untimely death. And bankruptcy debtors need to beware that even after a bankruptcy case is filed, the death of a relative or loved one can result in additional issues in their bankruptcy case.

Maple Grove MN Bankruptcy & Taxes

It is a common assumption on the part of my clients that there is no way to escape tax liability in a Maple Grove MN Bankruptcy case. While that is often true, a bankruptcy discharge will discharge income tax liability under a specific circumstance. The rule is fairly simple and straight-forward:

First, the tax return for the year of the tax liability must have been due at least three years before the bankruptcy case was filed. Second, the tax return must have been filed at least two years before the bankruptcy case was filed. Third, the tax liability must have been assessed against the person filing the bankruptcy at least 240 days before the bankruptcy case was filed. The person filing bankruptcy must meet all three conditions in order for the tax liability to be discharged. One out of three or two out of three isn’t good enough.

There are several things to keep in mind with respect to the rule of discharged taxes. First, the tax return is due on April 15th of the year after you earned the income. Not everyone files their taxes on time though - and for those who seek an extension, the “due date” on the taxes becomes October 15th. So if you did not file for an extension, and the tax liability you have is from 2012 or earlier, you meet the three year rule. If you applied for an extension to file your 2012 taxes, though, you would have to wait to file your bankruptcy case until after October 15, 2016.

Another issue is the concept of assessment. In order to be discharged, the tax must have been personally assessed against the bankruptcy debtor at least 240 days before the bankruptcy case is filed. When you file your tax return, if you show on your return that you owe taxes, you are assessing yourself the tax liability. However, there are times when the taxing authority assesses you after you file the return - when they tell you that you owe taxes, or you owe taxes in a greater amount than you indicated. When the IRS makes the assessment for you, that is the date your taxes are assessed. And if you owned a corporation or an LLC, and the business owes taxes, these taxes are not assessed against an individual until the IRS sends the taxpayer/bankruptcy debtor a notice of assessment.

There’s an opportunity to have income tax liability discharged, but you must meet all of the criteria to do so. Talk with one of our Bankruptcy Attorneys in Maple Grove, MN  to make sure you have correct information about the potential to discharge old tax liability. Call 612-843-0529 or set up a meeting to visit with us at:

13700 Reimer Dr. N Maple Grove, MN 55311

But what if you have tax liability that can’t be discharged? What do you do then? Well, bankruptcy offers you some options, but that’s the material for my next blog.

Topics: Maple Grove MN Bankruptcy

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