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BANKRUPTCY DEMYSTIFIED. Brian Hanlon 2011 FTDTA Conference. Historical Overview. Bankruptcy laws discussed by founding fathers during earliest meetings of the Continental Congress. Context involved two primary areas of concern:
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BANKRUPTCY DEMYSTIFIED Brian Hanlon 2011 FTDTA Conference
Historical Overview Bankruptcy laws discussed by founding fathers during earliest meetings of the Continental Congress. Context involved two primary areas of concern: • Rejected of notion of a “debtor’s prison” that existed within English common law at the time. • Representatives from the 13 original individual colonies agreed Congress should be empowered to enact bankruptcy laws for purpose of “interstate” or “intercolony”. Result: Article I, Section 8 of the United States Constitution which provides Congress the power “To establish an Uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States”. a
Evolution of the United States Bankruptcy Laws Bankruptcy laws initially enacted after ratification of the Constitution. Eventually, “Bankruptcy Act” was enacted and subsequently updated in 1898. In 1976, the current United States Bankruptcy Code was enacted. This major rewrite removed archaic language from federal laws and updated bankruptcy laws to be coordinated with “Uniform Commercial Code” which governs traditional commercial transactions among businesses. Subsequently, substantial amendments to the Bankruptcy Code were enacted in 1994 and 2006.
Bankruptcy Courts/ Bankruptcy Judges Bankruptcy court system established by Congress exclusively under Article I of the Constitution. Exclusively handle bankruptcy matters. Bankruptcy judges are appointed; however, they are not appointed for life. The federal judicial system that you are probably most familiar, includes the appointment of federal judges for life. This system of appointment of federal judges with the “advice and consent” of the Congress was established under Article III of the United States Constitution. This distinction between an “Article I” bankruptcy judge and an “Article III” federal judge is not relevant to tourist tax collection.
Bankruptcy Courts/ Bankruptcy Judges cont… Relevancy is important on matters of appeal. Thus, if a party disagrees with a legal ruling of the bankruptcy court, one may appeal and request a “trial de novo” (new trial) before an Article III judge. The distinction is in this outline for the simple purpose of letting you know that bankruptcy matters may be considered by a federal district court rather than a bankruptcy court. There are various legal and factual reasons why a party may seek to have a bankruptcy case or bankruptcy issue “removed” to a federal district court. Again, this is not the subject matter of this outline but is a place to let you know that you may receive pleadings involving a bankruptcy matter that may be filed in a federal district court.
What Happens When Someone Files Bankruptcy? Filing of a bankruptcy creates an “estate”. An estate consists of virtually any interest in property. Section 541 of the Bankruptcy Code defines exactly what is included or excluded from a bankruptcy estate. The bankruptcy court will make decisions regarding anyone who has any type of “interest” in the estate In the event there are outstanding contracts between someone who is in bankruptcy and third parties then rights within those contracts can be determined by the bankruptcy court. The most familiar function of a bankruptcy court is the determination of how much someone who files bankruptcy owes creditors, followed by a determination of how much, if anything, must be paid to the creditors. Creditor/debtor relationship analysis is different depending on the type of bankruptcy filed. The three primary types of bankruptcy filed are: Chapter 7, Chapter 13, and Chapter 11.
Chapter 7 Proceeding Used when Debtor elects to relinquish all rights to the “property of the estate” to a Chapter 7 Trustee. The Chapter 7 Trustee conducts an analysis to determine whether there is any money available or “equity” available to liquidate and pay unsecured creditors.
Chapter 13 Proceeding Available for individuals who have a regular income. Sometimes referred to as a “wage-earner’s plan”. An individual with a regular weekly, bi-weekly, or monthly income files bankruptcy and lists all of their fixed expenses. Money left over after paying all fixed expenses is used to pay a Chapter 13 Trustee who then distributes the one payment to the various creditors involved.
Chapter 11 Proceeding Used to reorganize a company and continue operating. Involves reducing fixed expenses, increasing revenue, and obtaining court approval to pay remaining creditors over a fixed period of time. The culmination of this process is referred to as “Confirmation of a Chapter 11 Plan of Reorganization”.
What Happens in a bankruptcy proceeding? All assets and liabilities of a Debtor are listed and liquidated amounts due are determined. Once the assets and liabilities are determined, the liabilities are categorized and prioritized. Obligations of a Debtor to creditors are paid first to administrative expenses, then to priority claims, then to secured claims, and finally to unsecured claims. Determination regarding amounts due or distribution to creditors will take place in all three bankruptcy proceedings. However, the fact a creditor is determined to be in one of these categories (administrative expense, priority claim, secured claim, unsecured claim) does not necessarily mean there are any funds to pay that category of creditor. a
What Does All This Have to Do With Tourist Taxes? Nothing Tourist taxes or bed taxes are not “property of the estate”. The taxes, once collected at the time of rental are considered “trust fund taxes” within the bankruptcy context. Trust fund taxes may be addressed/ repaid in a variety of ways during the course of a bankruptcy.
What Can You Do to Assist Your Attorney in Collecting Tourist Taxes in a Bankruptcy Proceeding? Recognize your attorney will be reviewing either a Chapter 7, 13 or 11 proceeding and will need to make decisions regarding collection of the tax. Recognize unpaid taxes could be “trust fund unsecured taxes” and possibly considered priority taxes during the course of bankruptcy proceeding, or you may have filed your liens and the taxes may be considered as secured claims within the bankruptcy proceeding, or tax returns may not have been filed, audits may be underway. All these alternative “facts” are important to your attorney and are needed in order to effectively ensure collection of the taxes within the bankruptcy.
What Can You Do to Assist Your Attorney in Collecting Tourist Taxes in a Bankruptcy Proceeding? Cont… Create a summary of facts in a chart format. I suggest using the following columns: • Month • Tax Return Filed (Y/N) • Tax Paid (Y/N) • Tax Amount Due • Interest • Penalties Review this summary or create your own summary with your attorney. The reason all these separate categories are helpful is that the attorney may be challenged in court regarding the amount due. Your attorney will need this itemization in summary format to efficiently argue for payment before the court.
Pre-Petition and Post-Petition Tax Obligations Pre-petition tax obligations are those taxes incurred or collected BEFORE the Debtor filed bankruptcy. • The date a Debtor filed bankruptcy can be found on the bankruptcy notice of commencement that most of you will receive in the normal course of business. • In the event you receive notice of a bankruptcy by telephone call or face to face meeting with field personnel, then simply ask for the case name, date of filing, case number and court in which the bankruptcy was filed.
Pre-Petition and Post-Petition Tax Obligations Post-petitionincurred at any time AFTER the bankruptcy is filed. The following two important points should be actively enforced. • Post-petition taxes must be paid. • Post-petition tax returns must be filed. Be sure to keep your attorney advised on a monthly basis regarding post-petition taxes that are paid or unpaid and tax returns that are filed or unfiled. A bankruptcy may be dismissed if a Debtor fails to pay taxes or file tax returns post-petition.
Summary The most important aspect of efficient collection of tourist taxes in a bankruptcy is providing accurate information in a timely manner to your attorney. Every attorney has their own preference regarding preparation of pleadings for filing with the court. Meet with your respective team members and supervisors and create a system that works for your office and your team members. There is no one way to handle these matters. If the process in place works for you and you get paid, it is the correct way to handle the bankruptcy tourist tax collection matters for your office. Your chart should separate pre-petition and post-petition tax obligations.
