Pearl Dwek filed for bankruptcy under Chapter 13.  Before the Court had confirmed her plan, she filed a motion to modify the stay to extend the period of her payment plan to allow her to proceed in U.S. Tax Court on her innocent spouse claim.  In addition she moved that the court allow her to continue receiving distributions of $12,000 per month from the bankruptcy estate.

The court denied her motion to extend the plan and continue to receive distributions, finding it uncertain that her plan would be confirmed due to the remaining undecided tax issue of her innocent spouse defense.

The court stated there was no clarity on whether it had jurisdiction to hear the innocent spouse claim.  In fact, the debtor and IRS agreed that the Tax Court had the clearest jurisdiction to resolve that issue.

The court found that dismissal was in the best interests of the debtor since she could file another petition under Chapter 13 if successful with her innocent spouse defense; or, perhaps file under Chapter 11, if not successful.

The reference to Chapter 11 is noteworthy.  Chapter 11 is available to consumer debtors; and, taxes are not consumer debt and could qualify.  Still, Chapter 11 was primarily enacted for and is used most often by corporations or businesses. For that reason filing fees are higher and attorney fees are generally higher and billed on an hourly basis mostly by larger firms.  Consumer Chapter 7 or 11 filings, however, are most often handled by sole practitioner or smaller law firms for a flat fee.

The bankruptcy stay did permit Pearl Dwek to resolve most of her non-tax debts which might not have been possible without protection of the stay.  Thus, after the dismissal she could presumably address the tax debt without ongoing harassment by other creditors.

Re Perl Dwek, Case NO. 11-37368, D NJ, 7/29/13.

Deciding whether to attempt to employ bankruptcy to discharge tax debts requires both tax and bankruptcy expertise to avoid getting blind-sided by an unexpected tax claim or objection for not having filed returns, for having filed false returns or for filing the petition too soon after assessment or the filing of returns.  Also, tax liens on pre-bankruptcy owned assets are not erased by a bankruptcy; and, trust fund employment taxes are not dischargeable.  The advantages and disadvantages of tax collection alternatives such as Offer in Compromise or Installment Agreement (and Partial-Pay Installment Agreement) should be considered before filing for bankruptcy.  And, don’t overlook “Currently not Collectible” status which can work very well when one’s financial situation is not expected to improve before running of the collection statute of limitations (10 years from assessment unless tolled by certain events such as filing for a collection due process hearing).

© 2013 by Robert S. Steinberg, Esquire
All rights reserved