AP Filing Appropriate?

[rickyricardo]

I am in Chapter 7 BK and pro se. I have two debts falling under Priority debts. Trust Fund taxes, and Student Loans. When I filed my petition, my Schedule E reflects the total amount of claims, amount entitled to priority and amount not entitled to priority. My position is that the penalty portion of the tax debt, and the collection fee portion of the student loan debt are not entitled to Priority status and are unsecured and therefore dischargeable, and I have listed them as such on Schedule E. There is no real dispute over the total principle amounts of either of these debts, and I am not seeking a discharge of the principle amounts. Do I need to proceed with an AP to determine the dischargeability of these "unsecured" portions of the Priority debt or are these portions discharged without challenge?

[HHM]

Do you have any actual research or case law that supports your position?

This isn't the first rodeo for these issues, there are plenty of lawyers around the country that have encountered these issues. My sense is, since you are actually asking here, you have NOT done your homework on this issue.

[rickyricardo]

Where Might These Other Rodeo's Been Held?

Im a bit confused on your response, as it does not offer any guidance on the issue I have posted, simply seems to scold me for bothering to ask. I have found NOTHING researching the issues, and this forum is part of that research. You state this is not the first rodeo for these issues. Great! Can you point me to where these issues have been presented to the Courts previously and their outcome?

[rickyricardo]

Found a better forum for my questions. Here are the precise answers!

Can Penalties Associated With State Trust Fund Taxes Be Discharged In Bankruptcy?

Question:

I have filed Chapter 7 Bankruptcy Pro Se (without an attorney). I am aware that trust taxes owed to the State Department of Revenue are not dischargeable, so I listed the principal tax as a Priority Claim but listed the penalties as an unsecured debt and subject to discharge. Am I correct in my position that I can discharge the penalty portion of the trust taxes?

Answer

The initial issue is not whether the tax penalties are dischargeable; the issue is whether you are personally liable for the penalty portion of the tax in the first place. The answer to whether you are liable will mostly depend on state law (not bankruptcy law). The most common “trust” taxes are employer withholding tax and sales tax. In general, if you owe those types of tax, that means you are operating a business of some kind. Question: Is the business incorporated (e.g. LLC, S-Corp., or C-Corp). If yes, then odds are you, as the owner, are not personally liable for the accrued penalties, but are only liable for the principal tax. Thus, for bankruptcy, the penalties are a moot point. Why is that?

The tax liability starts off as a corporate liability; the corporation is initially responsible to pay employee withholding tax, sales tax, etc. If the corporation fails to pay, penalties and interest start accruing on that tax; those penalties are a liability of the corporation for its failure. If the corporation goes long enough without paying, eventually the state will shut it down. At that point, every state has some mechanism to hold the owners (and other responsible parties) responsible (liable) for the tax. In most cases, the owner will only be held liable for the original principal tax. However, you must look to your state’s tax code to determine the extent to which owners are liable for trust type taxes.

However, if the business was operated as a sole proprietor, then there is no separate legal entity and therefore the business owner/operator is liable for 100% of the tax plus all penalties and interest.

Assuming you are liable for the tax and penalties, can chapter 7 bankruptcy discharge the penalty portion? Unfortunately, to truly answer that question, I would need to know the type of penalty. For chapter 7 bankruptcy, the general rules are these.

If the underlying tax is dischargeable, then the penalty is dischargeable,
If the event that gave rise to the penalty occurred more than 3 years ago, the penalty is dischargeable, or
If the penalty is punitive in nature and does not represent a financial loss, the penalty is dischargeable.
Therefore, the issue will turn on the type of penalty and when the penalty was assessed.

[rickyricardo]

Are Student Loan Collection Fees and Penalties Dischargeable in Bankruptcy?

Question:

I have filed Chapter 7 Bankruptcy Pro Se (without an attorney). I am aware that my student loans with the Dept of Education are not dischargeable. I listed in my Bankruptcy Schedules, Schedule E Creditors Holding Unsecured Priority Claims, the principle balance of the student loan debt, entitled to Priority Claim. I listed student loan collection fee as not entitled to priority, therefore unsecured debt and subject to discharge. I have researched until my eyes are falling out of my head on this position, and find NOTHING. Is my position legitimate? The collection fees are not part of the original student loan debt. The collection fee was added by a third party. It is not a debt being claimed owed by the Dept of Education currently. I am preparing an Adversary Proceeding to determine the dischargeablity, but representing myself is already enough of a daunting task.

Answer:

First, on a technical point, student loans are not priority debt. Student loans are non-dischargeable, but student loans are not priority. Although most priority debts are non-dischargeable, not all non-dischargeable debts are priority. Priority debts are listed in bankruptcy code section 507 whereas non-dischargeable debts are in section 523.

Second, I empathize with your frustration on researching this issue; although I cannot claim to have exhaustively researched the issue, I have not found any case law authority to back-up your position. To be honest, I found that result a little surprising because the argument you are proposing is not particularly novel to have never been brought up; but given the nature of student loan debt, most attorneys simply shy away from the issue. The bankruptcy code section at issue is 523(a)(8). That section lays out 3 independent criteria that define a student loan as non-dischargeable. The gist of your argument, as I understand it, is that the collection fee and penalty portion of the student loan debt did not confer any educational benefit and was not used in a manner consistent with the definition of a “qualified educational loan” under United States Code, Title 26, Section 221(d)(1).

However, the cases I have reviewed on this issue simply look to the original purpose of the loan. If your original loan satisfies the criteria for a non-dischargeable student loan (absent a hardship finding) then every term of that loan (the ability to charge collection costs, attorneys fees, etc) fall under the definition of a student loan and are therefore non-dischargeable. Thus, if the underlying loan is non-dischargeable, then any associated debt or charges related to that loan are non-dischargeable ( I admit, that is counter intuitive because in other contexts, such charges are dischargeable; e.g. taxes).

The problem with student loan debt in bankruptcy is Congressional intent. The bankruptcy courts, when presented with a student loan issue, almost always side with the student loan lenders because Congress went out of its way to express intent to not want student loans discharged. So, most judges lack the courage to help those suffering from the indentured servitude that is student loan debt.

[rickyricardo]

I have spoke with the Department of Revenue for my State. They are aware that I am asserting the position that as a Corporation I am not liable for the penalty portion of the Trust Fund Tax debt, and agree with me. They are preparing a penalty abatement, rather then awaiting the discharge. I have relieved myself of $7k in penalties which most would not know to challenge. To read HHM's post to my original question is an excellent example of the attitude most take. Take that. I will be moving forward to challenge the collection portion of the Student Loan debt.

[HHM]

I am sorry for being short with you; must have caught me on a bad day. It looks like you found some answers, so that is good.

Please continue to participate in this forum, we would all be eager to know how the student loan issue plays itself out.

The funny thing is, I did try to answer your question, but I put it in the wrong place

http://www.bkforum.com/showthread.php?t=58428

[montana59451]

Where is this forum located? Would like to visit it as this forum does not always get my questions answered. Thanks

[jdcat]

askmethner.com

[rickyricardo]

Yes, askmethner.com seems to be a great resource. I actually originally had trouble using the forum and contacted the methner law firm it is associated with. They were very friendly and willing to help.

[jdcat]

I check in at that website quite often, very good info!

[montana59451]

Thanks!