Articles Posted in Student Loan and Tax Debt

Student loan and tax debt – nobody likes dealing with either of these areas. Almost everyone thinks that bankruptcy cannot help in these areas either. Not true! There of course is a lot of proposed new law regarding student loan and tax debt that is being considered in regards to giving bankruptcy more room to help, but it still can help even now.  Right now, you cannot file bankruptcy and wipe out Sales Tax (or other certain types of taxes), but you can file bankruptcy and wipe out your Income Tax (if it meets certain criteria). The income tax debt has to be a certain age, your tax returns must have been filed, and a few other things which we discuss in this area of our blog. If you have taxes that are new or do not qualify to be wiped out in a bankruptcy, you can still file a Chapter 13 case and extend out repayment of the taxes for up to 5 years. Often the IRS will only offer 2 year agreements, which depending on the amount you owe, could be unreasonable where as a 5 year plan may be much more doable.  Student loans for the most part cannot be wiped out by bankruptcy. Private student loans and Federal student loans have an exception called “undue hardship” that you can apply for but it is extremely hard to qualify. So Bankruptcy can help by stepping in and forcing a halt on payment of student loans or force an amount that is something you can afford – either way – for up to 5 years.

As a result of legislation enacted by Congress, the student loan payment freeze is ending. Student loan interest will resume Sept 1, 2023. For most, payments will be due in October 2023. It is expected that nearly half of borrowers are unable to begin making payments again. Many people are simply not in a stable enough position to begin with these payments at this time.  One in five borrowers are facing monthly payments over $500! Another survey stated one out of four will have to consider putting off buying a house or getting married in order to begin payment on their student loans again.

If you are entering repayment or beginning your student loan payments for the first time, there are 3 things you should do now.

  1. Make a budget – take a hard look at your monthly income and expenses.

student-loan-fresh-start-actFor a long time now, student loans have been pretty much prohibited from being discharged through bankruptcy.  That could change by the looks of this proposal.  The S.2598 – FRESH START Through Bankruptcy Act has been recently referred to committee.

Why is it so hard, if not impossible, for people to get rid of student loans through bankruptcy now?

Due to a 1976 law, student loans are not allowed to be treated like other forms of debt (ie: credit cards or car loans). This comes from a federal commission on bankruptcy laws that heard testimony claiming the discharge of student loans could damage federal student loan programs. Congress was concerned that students could borrow thousands from the federal government, then graduate, then file bankruptcy, and never repay their student loan debt.

protection-150x150Here are 4 steps you can take to avoid a having your tax refund taken for a Student Loan default:

  • Get your student loans out of default. After nine months of nonpayment your student loans go in to default status. Making the minimum payments on time will keep you out of default.
  • Ask for a deferment or forbearance. If you can’t pay your loans on time, ask for a deferment. A deferment can postpone payments for up to three years. Depending on your loans, interest may or may not continue to accrue if you’re in deferment. You can also request a forbearance, which pauses your loan payments for up to one year. A forbearance has different eligibility rules and interest continues to add up during the forbearance period.

tax-time-e1523477928357If your tax refund has already been taken you need to request an Offset Refund.

If you think your tax refund may be been taken in the future, you need to request an Offset Refund to protect your tax refund from being taken.

You can request an refund whether your tax refund has been taken from you or not. There is no time limit to make the request, but you should move as soon as you can to protect your IRS Tax Refund.

Millions of letters are mailed by the IRS each year to taxpayers for many different reasons. If you get a letter from the IRS here are a few suggestions on what to do.

Open the letter right away and don’t panic. Most IRS letters will be about your federal tax return. Each letter will deal with a specific issue. Each letter will give you specific instructions on what to do. It is important you read the letter carefully. Read it two or three times, if necessary, to fully understand what is being said.

An IRS letter could be about changes to your account, taxes you owe, or a request for payment. It could be a request for more information about your tax return.

tax-return-150x150I’m speaking of your actual tax return – the 1040 Form with all schedules and attachments.  Make sure you get an electronic copy or a paper copy of your tax return if you’ve filed electronically.  Starting with 2017 tax returns, the IRS may ask you for the amount of your Adjusted Gross Income (AGI) from the last return you filed in order to verify your identity.

The Adjusted Gross Income (AGI) is the amount at the bottom of the first page of your tax return. So, if you file your own tax return, print a copy or save it to your computer before you log out. If you use a tax preparation service, make sure you get a printed or emailed copy from them when the tax return is filed.  Trying to track down the person that prepared your taxes six months or more later to get a copy can be a frustrating process.

There are also many other reasons to always maintain a copy of your tax returns.  For example, you may be asked to provide a copy of your tax return for your child when they apply for college and/or financial aid.  If you are considering filing bankruptcy, you will need to provide a copy of your last two years of tax returns to the Trustee. Whenever you wish to buy a home, you will be asked to provide copies of tax returns by whomever you are applying with for a mortgage loan.

Criminals are impersonating IRS agents and making aggressive and threatening phone calls to taxpayers.

phone-scam-150x150During filing season, the IRS sees a surge in scam phone calls that threaten police arrest, deportation, license revocation and other things. Be on guard against these con games that happen throughout the year, especially during tax season.

“Don’t be fooled by phone calls by criminals impersonating IRS agents with threats or promises of a big refund if you provide them with your private information,” said IRS Commissioner John Koskinen. “If you’re surprised to get a call from the IRS, it almost certainly isn’t the real IRS. We generally initially contact taxpayers by mail.”

“Everyone can share the word about scam phone calls– just hang up and don’t engage these people,” Koskinen said. “Despite recent successes against phone scam artists, these scams constantly evolve and people need to remain vigilant. We’d like to thank law-enforcement, tax professionals, consumer advocates, the states, other government agencies, the Treasury Inspector General for Tax Administration and many others for helping us continue this fight and protect taxpayers.”

How do the scams work?

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There are 4 ways you can get a copy of your tax return information or transcripts.  If you are filing bankruptcy, you will need a copy of the last 2 (two) years filed tax returns regardless of whether you owe(d) taxes or receive(d) a refund.  Example – if you were filing bankruptcy in March 2015 and had not filed taxes yet for 2014 (not due until April 2015), you would need a copy of 2012 & 2013 tax returns.  If you were filing bankruptcy in May 2015, you would need a copy of 2013 & 2014 tax returns (unless you had filed an extension for 2014).  Unless you are exempt from filing (click here to see who is exempt), you must have filed all the tax returns that are due prior to filing for bankruptcy.

If you have lost your copy, there 4 ways to gain another copy of your tax return or transcript for whichever years you are in need of:

  1. Online – go to www.irs.gov and click on “Order a Tax Return or Account Transcript”.
  2. Call 1-800-908-9946 and follow the voice instructions.
  3. Mail – IRS Form 4506-T or Form 4506-T-EZ “Request for Transcript of Tax Return”.  The forms are available online (see #1 above) or by calling 1-800-829-3676.  The transcripts will be mailed to your home address, at no charge.  You must allow 5-10 days delivery time.
  4. Go to IRS office – There is an IRS Tax Department office located at 100 W Capitol Street, Jackson, MS. You may have to wait in line, etc, but if you are in a rush and do not have online access, it is possible to go to the IRS office and obtain a copy on the spot.  There may be other office locations that can assist you.  Look online or call the nearest IRS office and see if they provide this service. Not all locations provide the same services.

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tax-refundWhether you have already filed your tax return and received your tax refund yet or not, if you are thinking about filing bankruptcy, you may be wondering whether or not you’ll get to keep your tax refund.  Under Chapter 7 and Chapter 13 bankruptcy, your tax refunds are protected by Mississippi Law.  This means that your income tax refund is protected (exempt).  It is a protected asset (up to a certain amount). Mississippi law allows you to keep up to $5,000 in federal tax refunds ($10,000 as a married couple filing jointly), up to $5,000 in Earned Income Tax Credits ($10,000 as a married couple filing jointly), and up to $5,000 in state tax refunds ($10,000 as a married couple filing jointly).  So if you’re asking, “If I file bankruptcy, can I keep my tax return?”, as long as you don’t receive a refund above those amounts, filing bankruptcy won’t affect your tax refunds.

What if your federal tax refund is more than the protected amount?  If you get more than $5,000 back each year from the IRS, the best thing you can do is adjust your withholding to reduce the amount of taxes you are paying and maximize the amount of money you take home each pay period.  With food and fuel prices going up, most of us need the money in our paychecks right now, rather than getting a large sum back at tax time.

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Did you cosign for a student loan for your child or spouse?  Co-signers and the student  borrowers both owe the full amount of the loan.  The primary borrower might pay the loan now, but if they stop paying, those debt collectors will be coming after the the co-signer for the loan.  ***It’s important to keep in mind that the student borrower could file a Chapter 13 and protect you as the co-signer should they get into a situation where they cannot make their payments or, if necessary, you could file a Chapter 13 to protect yourself.*** But back to our discussion…

Co-signers can be released from student loans.  It’s tricky, but in many cases there is a way out for you.  The facts depend on whether it is a federal loan or a private loan and the terms of the loan.

For instance, if the primary borrower for a federal student loan dies, then the loan can be discharged and the co-signer is released.  It works the same way if the primary borrower becomes permanently disabled.

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