Bankruptcy & Taxes

As Benjamin Franklin noted, “[I]n this world nothing can be said to be certain, except death and taxes.” It’s good advice when you need some perspective, and when you are filing for bankruptcy. While you’re probably going to want to hire a different lawyer to work with you on the death part of the equation, we work to make sure our clients are ready to handle the tax consequences of a bankruptcy filing.

The first thing to know about bankruptcy and taxes is that most tax debt is not dischargeable. This means you cannot wipe it away by filing for bankruptcy. You will still owe most of the taxes you owed before you filed for bankruptcy after you come through the process.

The only exception to the debt-is-not-typically-dischargeable-rule that is worth noting is that it is sometimes possible to discharge income tax debt that is a few years old. If the taxes came due over three years ago, and you filed your tax returns on time, and you did not commit fraud, it might be possible to have some or all of the older income taxes you owe forgiven. You will, however, still owe any penalties the IRS imposed that are related to the debt.

If you have a lot of non-dischargeable tax debt that you are struggling to pay off, you should ask your bankruptcy attorney about negotiating a settlement or entering into an installment payment plan with the government. This obviously isn’t as helpful as having that debt forgiven, but it can help you get your finances under control so you can move forward without stressing about how you will ever pay off what you owe.

Another tax-related thing that your bankruptcy attorney should help you with is your yearly tax filing. Depending on what chapter of the bankruptcy code you file under, you may need to file a separate tax return on behalf of your “bankruptcy estate.” Your personal return will cover the stuff it usually does while all your debts and assets taken over by the bankruptcy court will be accounted for in the other filing. It is critical that this be done properly or the government can impose harsh penalties.

A Bankruptcy Success Story

Those of us that work at Hanson & Payne firmly believe our bankruptcy system is a force for good. There are of course things we would change about it, but by and large it does what it is supposed to do, and it does it well. It gives people and businesses the promise of a fresh start. The planned opening of three Gander Outdoors stores in the Milwaukee area this year is a great example of what we mean.

Kenosha, Sheboygan, and Waukesha will all see former Gander Mountain stores that closed when that company filed for bankruptcy re-open as Gander Outdoors stores this year.

The turn-around comes courtesy of Marcus Lemonis, who you may have seen on CNBC’s “The Profit,” and the bankruptcy system. Lemonis has built an outdoors adventure and lifestyle empire by acquiring several smaller companies who were struggling to compete with the Cabela’s and Bass Pros of the world. He is presumably gaining market share and expertise through his purchases that will allow him to compete with the big guys. But he wouldn’t have been able to do what he is doing as well as he is doing it outside of the bankruptcy system.

The bankruptcy system gives those who have filed the ability to restructure and rethink. It can minimize financial pressures that stifle innovation. And it allows owners to step back and reflect on how best to move forward.

Our firm works with a lot of companies that are contemplating bankruptcy, so we know that it can be hard to appreciate these benefits when all you can think about is the fact that you might be going out of business. We understand that bankruptcy is not easy or exciting choice when it is your business.

We all mourn a bit for the Kenosha County-founded catalog retailer that grew into that local Gander Mountain store with the white gander flying against a red backdrop. But it is also exciting to consider that instead of being lost to history, the company has been reborn and will continue to serve lovers of the great outdoors in our area.