Bankruptcy Glossary- Basic Terms Defined

Bankruptcy Terms Glossary

Automatic Stay:

An injunction that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.

Bankruptcy Code or Code:

The informal name for title 11 of the United States Code (11 U.S.C. §§ 101-1330), the federal bankruptcy law.

Discharge:

A release of a debtor from personal liability for certain dischargeable debts set forth in the Bankruptcy Code. (A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.)

Exempt Property:

Property owned by the Debtor(s) which is protected from the creditors in a bankruptcy. For example, in Colorado you can have $60,0000 or $90,0000 exemption for equity in a home where you live

Means Test:

Section 707(b)(2) of the Bankruptcy Code applies a “means test” to determine whether an individual debtor’s chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13).

Priority Claim:

An unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. Priority refers to the order in which these unsecured claims are to be paid.

Proof of Claim:

A written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money. (There is an official form for this purpose.)

Preference:

A debt payment made to a creditor in the 90-day period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than the creditor would receive in the debtor’s chapter 7 case

 

341 Meeting:

The meeting of creditors required by section 341 of the Bankruptcy Code at which the debtor is questioned under oath by creditors, a trustee, examiner, or the U.S. trustee about his/her financial affairs. Also called creditors’ meeting.

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Debt Forgiveness, Form 1099-C and Bankruptcy; You May Have Options to Legally Avoid Tax

Persons who are able to negotiate debts and have them forgiven or reduced are often surprised to find that the IRS considers forgiveness of debt to be income, and therefore taxable. In this circumstance, where the amount cancelled is $600 or more, the creditor will send the debtor and the IRS a copy of form 1099-C. The taxpayer will then report this as “other income” on line 21 of Form 1040 when they file their federal income tax return.

But, not all cancelled debt is subject to taxation, though many taxpayers don’t know this fact. If you are “insolvent” according to IRS rules, you may legally avoid paying tax on the forgiven debt.

In order to take advantage of the insolvency exemption, however, taxpayers must fill out and attach IRS Form 982 along with the 1099-C to their federal income tax return. See also IRS publication number 4681, where you will find a worksheet to help calculate whether you were in fact insolvent when (in the tax year) when the debt was cancelled. More good news, for several years, you may be able to amend your return to claim insolvency for a prior year. Determining insolvency in this context can be complex and if the amounts involved are significant, finding an accountant is probably wise.

In a bankruptcy, cancelled debt is of course not taxable for that year, you are by definition insolvent for the purpose of paying income tax on discharged debt. Persons who get their debt eliminated by way of bankruptcy in Colorado generally do not have to worry about paying taxes on those amounts. Moreover, if you negotiate a debt down and then file bankruptcy in that year, you will also likely not have a tax problem. Sometimes, the creditor will write the debt off on their own, and send you the 1099. Seek professional advice in these circumstances.

It is estimated that only about 1 in 10 people who receive 1099s file the accompanying application for the insolvency exception. This is true even though roughly half of these taxpayers would qualify. In my practice I try very hard to inform clients of these issues, and the effect of filing bankruptcy or settling debt.

A Colorado bankruptcy lawyer should take a holistic approach to clients’ situations and debt. The goal is to get to the other side with as little debt as possible, and with a fresh start. I do attempt this with each and every client. I meet my clients, personally, and work with them for a “global” solution that makes sense. If you think I could help your family, please call (303) 670-4242 for a free consultation.

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New, Increased Filing Fees For Bankruptcy in Colorado

adfixedgreenPeriodically the filing fees in U.S. federal and state courts in Colorado change. The District of Colorado Bankruptcy Court will be increasing its fees for filing and general services. The new rates took effect June 1, 2014. 

Some of the more common filing fees are now as follows for common types of cases/ issues: Chapter 7 bankruptcy in Colorado $335, Chapter 13 Bankruptcy in Colorado $ 310, Chapter 11 $1717, filing an adversary proceeding $350, filing an amendment to add creditors $30, and a motion to reopen a Chapter 7 bankruptcy in Colorado now costs $260 to file.

Preparation is the key to success in any legal matter, and meeting with your bankruptcy lawyer as soon as possible to determine the appropriate chapter of the Bankruptcy Code to use, and which fee(s) will apply, will help your case go smoothly right from the beginning. Though I welcome emergency filings, coming up with a good deal of money to get the case filed, in a short amount of time, just adds to the stress Debtors are facing. If you feel a bankruptcy may be necessary, call for an initial free consultation and I will discuss the fees and costs with you at the outset so you can plan ahead. Unlike many things in life, filing fees and legal fees paid to remove debt, have a certain guaranteed return. I can help. – Robert Gauss, Esq. (303) 501-4018.

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