A Case Note: Potential Tax Strategies for a Debtor Trying to Avoid Bankruptcy

• Date: 01 September 2017
• Published date: 01 September 2017
• DOI: http://doi.org/10.1002/jcaf.22292

41

© 2017 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22292

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A Case Note: Potential Tax

Strategies for a Debtor Trying to

Avoid Bankruptcy

Valeriya Avdeev and Sia Nassiripour

INTRODUCTION

Although bank-

ruptcy petitions have

been decreasing in

recent years, they are

still a going concern

if our economy is to

recover at a steady

pace. Most of the

bankruptcy peti-

tions are filed by

individual debtors,

not by businesses.

For example, in 2014,

there were a total of

963,739 bankruptcy

cases filed in the

bankruptcy court.

Out of that total,

935,420 or 97% were

nonbusiness or indi-

vidual filings.1 Also,

in 2014, 642,366 or

66.7% were Chapter

7 filings, 313,262 or

32.5% were Chapter

13 filings, and 7,658 or 0.8%

were Chapter 11 and Chap-

ter 12 filings.2 However, even

though most of the cases are

filed by individual nonbusiness

debtors, a typical Chapter 7

debtor will not appear in court

and will have a very limited

interaction with the

bankruptcy judge.3

Chapter 7

debtors will not see

a judge unless an

objection is raised

in a case.4 Chapter

13 debtors might

appear before the

judge only at the end

of the proceeding at

the time of a plan

confirmation hear-

ing.5 However, the

debtor is required to

meet with creditors

during a section 341

meeting.6

In the state of

New Jersey alone,

there were 31,534

bankruptcy petitions

filed in the 2012 cal-

endar year. Similarly,

as of September

30, 2013, there were

28,882 bankruptcy

petitions filed in the state of

New Jersey.7 A typical debtor

who is forced into bankruptcy

has substantial credit card debt

In the State of New Jersey alone, there were

31,534 bankruptcy petitions filed in 2012 cal-

endar year. Similarly, as of September 30, 2013,

there were 28,882 bankruptcy petitions filed in the

state of New Jersey. A typical debtor who is forced

into bankruptcy has substantial credit card debt

and one or several mortgage liabilities. Unable to

pay on the obligations as they become due, the

debtor defaults. Once in default and the liability

on the debts are over $14,425, creditors can file

an involuntary bankruptcy petition and foreclose

on the existing properties. New Jersey remains

the state with the second-highest foreclosure

rate behind Florida, according to CoreLogic’s

monthly National Foreclosure Review. Nationwide,

5.55 percent of homes are late on their mortgage

payments. Moreover, if any portion of the mort-

gage debt is forgiven as part of the foreclosure

process, it could trigger tax consequences. This

paper examines what choices does a debtor

have when faced with multiple delinquencies.

© 2017 Wiley Periodicals, Inc.

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