Very stressed after meeting with 2 attorneys and need advice

[MrBojanges]

I am another long time reader and first time poster. Been reading for a few months and thought I had a pretty good grasp on things and looking at a chapter 7. I stopped paying my cards this week and visited with 2 attorneys. Now I am worried and stressed beyond belief on a few issues I did not know would be issues until my meetings.

First a brief background. Under state median by about 20,000 a year. $80,000 credit card debt and 4,000 secured. House current and fully exempt in my state. I plan on keeping house. Filing alone wife only 3,000 debt not a community state. I am fully prepared to be 100% upfront and honest but don't want to open a can of worms if I don't have to. Here are my issues.

1. I sold stuff on ebay for the last 4 or so years. I would buy stuff and resell it. This was done part-time and I was very inconsistent and probally broke even over the 4 years. At times I would have 14,000 in my paypal account and then use it to pay off credit cards I used to buy the inventory. But mostly I had a few thousand dollars that was used to pay off inventory. This started as way to make a little extra money and in the end I lost probally 5,000 the last year. I never reported this on my taxes since it started as just a few things but looking back I did probably 20,000 in sales a few years. I kept absolutly zero records. My attorney says I probably need to list it as a business. This advice was given during the initial consultation and it hit me on the way home how much of a problem this could be. It has been 6 months since I sold anything and really over a year since I had any major activity. I expect the trustee to really dig in and go over my records. Since I did not report this as a business and it is not on my tax returns I fear this may make the trustee dig in and trigger an audit. Should I try to recreate the last four years and admend my tax return or go with another attorney and not mention it as a business (which I never considered it a business but more of a hobby). BTW the 1st attorney didn't seem too concerned about selling a few things on ebay. I don't think he realizes how many sales I did.

2. Almost exactly 1 year ago I got a "settlement" from a class action lawsuit I joined about 4 years ago. I forgot I even did it. It was about 6,000. I cashed the check and put it "under the mattress". This has since be wasted away and I cannot even recall how it was all spent, it just got used. I did give half to my wife so I spent 3,000. The package my attorney gave me asked if I had any lawsuits in the last year. I retrieved my paperwork that came with the check from the lawsuit to examine and realized that a 1099 was included with the check. I did not even notice this 1099 form at the time and did not add this to my taxes this year so that is another problem. Should I amend my taxes before or after filing? I am not even sure this is taxable income. In a few weeks the settlement will be over a year old and technically I will not have to add it on my attorneys sheet he gave me.

If I can get past these 2 issues I feel I am in for a routine chapter 7. Please give me any experienced advice.
Thanks!

[Brighterdays]

First of all, Your cash from a year ago should be safe. Some one just asked the same question about 25k they inherited. 1 year seems to be the limit, but ask your lawyer.


A few questions.

1.) Did you report any of your ebay stuff on your taxes?
2.) Did you ever transfer money from paypal to your bank account?

Your credit cards are of no concern to the trustee, they only matter to the CC company if they dispute it. But if you don't have any charges for the last 6 months you should be fine.

The trustee looks at your bank account and if you don't have any transfers to it from your paypal, then close out paypal and don't bring it up again.

[LuciluS]

I would just look at your Deposits into your Paypal Account. If they are below $500 for each deposit, I don't think it's going to be a problem.
I tend to agree with the 2nd attorney.

I know the lawsuit money is exempt in your Means Test for Bankruptcy, but I'm not sure if it is taxable. I have the same issue as I received $5,000 in Feb. from a car accident in 3/05. I documented how I spent the money, just in case Trustee knows about it as we are filing 9/30/09 using Mar-Aug Income.

Google the Class Action Lawsuit and do some research on that 1099. If it's non-taxable and your Ebay deposits are small & you get past the year lookback, I would Nothing on either situations. But, I would let whichever Attorney you choose, know about both issues.

Luci

[MrBojanges]

None of it was reported on taxes. I transferred 18,000 in 2008 to my bank account and 30,000 in 2007 to my bank account, 2006 I transferred 5,000 to my bank account. I purchased items that cost usually 200 dollars and sold them for 200 to 400 dollars but sometimes I could not sell them and they would be worthless since the items I sold were time sensitive and worthless after a certian date. It would be a nightmare to me to try to figure out exactly what I made or loss and how it all flowed since I mixed it all with my home budget and floated all my bills throught the same checking account. I don't know what to do since I cannot pay all my minimums now and don't know how long I need to wait to make this old enough to not have to mention it. My last paypal transfer was for less than 300 in mid Decmeber of last year. No activitiy on my pay pay since a .01 dividend on 1-1-09. I have 2.52 in my account.

[MrBojanges]

Almost all the charges were on one card and were paid back. I currently owe about 600 on that card and none of the charges are from inventory. From PayPal I transferred to my checking 300 one time in Dec 2008, 300 in Oct 2008, 765 in Sept 2008, August 1200 I took as a check that I cashed and a few under 500 up to 1 year from now. If I wait until Jan 1st 2010 do you think I would be ok not bringing it up? I just don't want to have to try to account to the trustee where all this money went, it would be a nightmare to try to figure it out exactly. Most went back to pay off inventory and loss from unsold items. And since I did not report this as a business on my taxes I don't want to make matters worse.

[chad9162]

I think you're worrying for nothing. The settlement was over a year ago. Income for the means test is the average of 6 months preceding the filing date. Obviously you used the settlement for living expenses. NO BIG DEAL

Selling on Ebay, is a business. Obviously not reporting "Income" on federal taxes is "technically" bad but its not like you hid thousands of dollars.

You need to realize how business "income" (profit) is computed.

Gross Income minus Expense = Net Income.

Example.... Customer pays $20 for Item A (Gross Income)
Item A cost you $10 (Expense)
Shipping and packaging fees, Ebay and Paypal fees cost you $5 (Expense)

Gross Income ($20) minus Expense ($15)= ($5) Net Income

Other Expense you would include would be....computer cost/repair, internet cost, or anything related to business like a cell phone with data plan to check e-mails.

It sounds like you business has been inactive and last year a $5000 lost! Basically, you need to do Profit and Loss Reports (like the example above) for your business.

As for Federal taxes....losts are actually tax write offs. So for 2008 you missed out on a tax break ($5000 deduction). IRS only cares about unreported "income" so they can tax it. But sounds like after figuring expenses your "net income" wasn't much.

My business started in 2007. My Income after expenses for 2007 was
-$10Kish (that's right negative) and 2008 was
-$6Kish. I don't think you understand the difference between Gross Income vs Net Income.

An example of my P&L statements for last 6 months....given to attorney. I have more detail spreadsheets but this is what he wanted..

Profit and Loss Report-M Business

Month #1
Gross Income
Expense
Net Income

Month #2
Gross Income
Expense
Net Income

Month #3
Gross Income
Expense
Net Income

Month #4
Gross Income
Expense
Net Income

Month #5
Gross Income
Expense
Net Income

Month #6
Gross Income
Expense
Net Income

I think the trustee realizes that you didn't make millions on EBAY...in fact sinse you're Bking I'm 100% sure he'll come to that conclusion haha

[StartingOver08]

It really sounds like your business was a hobby.

It is probably prudent to amend your tax returns to reflect the 1099 you recieved for the settlement. Prudent because the IRS gets a copy too - an amended tax return is rather easy to do. Given your entire situation, I would try to recreate the records as accurately as you can, amend the tax returns and then file BK. As Chad points out - you actually have a 'loss' on your hands for last year which may help offset any additional tax you may have to pay on the unreported income. Who knows, once you go thru your records, you may find you did not make any profit over the years! Cash flow does not necessarily mean you have a profit.

[Floridagail]

Just my opinion, Sounds like ebay was hobby, I would not open can of worms. I would not mention it to attorney at all.
I would wait 6mos to file , So no deposits show up on bank account. You have to provide bank accounts for last 90 days. I waited over 2 yrs to file, CO sued me so I went ahead and filed.

I would amend the tax return for the 1099 6000 lawsuit , it would catch up with you sooner than later. It really doesnt matter as you spent it last year and it did not raise your income.

[Bankruptcy20]

Can I push this "tax theme" further? I don't follow why fears of scrutiny from a creditor or trustee makes one have to refile past IRS taxes... it strikes me as a general anxiety swinging from one world to another.

Let's say you have had sole Ebay sales over the years, let's say you have your nanny off the books, and so forth, and never reported in the IRS. Practically speaking, I would assume that you should assume that everything is discloseable, but understanding what creditors and trustees are incentivized to do (which is find money for themselves)... unless they want to try to use your IRS issues as a leverage for a settlement... I can't see why this is an issue. Geez, if you owe more to the IRS, those guys just end up getting less, anyways, as unsecured debt is less of a priority than taxes.

It just strikes me as general anxiety can lead one to overkill. But, I'd check with your attorney. Your Ebay sales as a percent of your household income does seem high, and there may be a "credibility" issue that a trustee can follow up on, as they could start wondering how a fella can not include such a relatively large portion of your cash flow (to be honest, that sort of struck me as well).

Here's an example of how I view the tax/BK inter-relation:

For me, my children's nanny is off the books. The trustee will see the monthly checks that I write to her every month (over $2k per month), she is off the tax books, I imagine if I even knew how to do it correctly on the IRS forms, she should be on the books. But, as an individual, I never learned how to pay federal, social security, medicare, etc, taxes for the nanny.

If I file Chapter 7 later on, I'm OK disclosing the monthly payments for my nanny to the trustees and creditors and if they want me to try to redo my past taxes and increase my past taxes because my nanny should have been on the books, so be it. If they want to depose her, and confirm that I did pay her, so they don't think that money is being sent elsewhere, that's fine. For my district, almost no one has their nanny "on the books" so I am not even thinking of this issue. If a trustee is as silly as wanting me to fire the nanny, then geez, kiss any possibility of future income goodbye, as I could never work in the future, and they are just making my case for me. Either way, the money to the nanny is gone, and I'm not even concerned as it has nothing to do with the trustees/CCs or other debt. There's no preferential treatment or fraud, or anything else, those guys should be concerned about. I can't even see why a US Trustee would care. Are they going to ask about your behavior as a five year old? I just don't see the relevance.

I've had some periodic Ebay/PayPal sales over the years. I've never reported any of such on my taxes, as it's immaterial relative to my income. But, in the last few months, I have had a LOT of PayPal sales in 2009, to try to raise cash. My checking account will show the sudden surge of transfers from PayPal. And my 6 month means test income will include it (got to be honest in your filing, folks). And guess what, I spent all that cash raised from PayPal, all legitimately, which I can prove. Frankly, I shrug. Who cares... if anything, it just proves I have no assets, as I sold pretty much everything readily sellable. If the trustee wants to quibble about 2009 taxes on those Ebay sales, I'm happy to agree that yes, there is now even more of preferential liability (in federal taxes) over what he is trying to raise for his unsecured creditors.