Can a Bankruptcy Filing Be "Expunged?"

A special thanks to our summer intern Mike Burgher in his assistance with preparing this article!

Expungement — Civil action lawsuit with the objective of eliminating from public record any criminal conviction.  Law on subject varies between states.  State Law for Michigan found under Chapter 780 in the Michigan Legislature.  Process and application for expungement found from 780.621 – 780.624.  Expungement is unavailable for criminals convicted of sexual offense under M.C.L. 750.520c, 750.520d, or 750.520g, a felony/attempted felony punishable by life imprisonment, a traffic offense, or if person has other prior convictions or convictions that had previously been set aside.  The process for an applicant convicted of a criminal offense must follow the steps listed from the following link (http://expungement.uslegal.com/expungement-of-criminal-records/michigan-expungement-law/)

Because bankruptcy is classified under a non-criminal offense and considered a voluntary action by the declaring party, expungement authority is unclear and decided on the discretion of the Judge for the individual case.  The U.S. Bankruptcy Code does not grant the Court any specific powers in these instances, nor does it offer much direction on how to proceed when a Bankruptcy Expungement case is brought before it.

The following cases show various rulings by the Court on different circumstantial hearings:

In re Buppelmann, In re Fountain (Pennsylvania, 10/18/2001)

This case ran in two parts.  The first part was between Helmet and Marguerite Buppelmann, and their attorney Eric Levande.  Helmet said he and his wife had signed a document that was attached to a list of creditors on 5/29/1996 due to medical bills incurred by Marguerite.  She passed away in early 1997, prompting Helmet to tell Levande not to file for bankruptcy.  But on 10/15/1997, Levande filed the documents for bankruptcy using forged signatures.  The case was dismissed because Helmet did not appear at his § 341 hearing.  Helmet wished to have his case expunged from public record.  The Court did not expunge the bankruptcy case, but instead indicated in the dismissed case file that the original filing of the case was due to fraud from Levande (or a party other than the Debtor) so as to alert creditors the reason for the bankruptcy filing.

The second part included Robert C. Fountain, who signed a petition in bankruptcy because of an arrangement between himself and Homeowners Rescue Service, with the understanding that the petition would not be filed unless he authorized it as a “last resort.”  He neither instructed the agent to file the petition, nor did he tell the agent not to file the petition.  The bankruptcy was initiated on 10/1/1998. For this reason, he wanted his case expunged.  The petition was later dismissed for not having all the required schedules.  The Court did not rule in favor of Fountain, citing that turning over a legal document to an agent made the assumption that the document could be filed at the convenience of the agent, and that the document contained no amount of fraud.

This case established a three-pronged course of action outline for dealing with Bankruptcy Expungement.  The 1^st course of action the Court could take for Buppelmann was to grant the request for expungement and destroy the related documents of the bankruptcy from public record.  The 2^nd course would be to add a notation to the filing petition indicating that the petition itself was fraudulent and occurred without consent from the debtor, for use by future creditors.  The 3^rd course was to order the court Clerk to delete all references to the debtor’s name(s) on all of the case dockets.  As seen in the first part of the case, the Court chose the 2^nd course of action.

In re Storay (South Carolina, 11/22/2006)

Johnny and Patricia Storay brought a case against their bankruptcy attorney, Blaine T. Edwards, citing that Edwards filed a bankruptcy case under the couple’s name without proper authority from either persons.  They sought to have attorney’s fees returned to them and have the bankruptcy case expunged.  The bankruptcy case had been filed 10/16/05 and dismissed 11/29/05 due to a “failure to file documents required by Title 11.”  The Court ruled in favor of the Storays, who were awarded the amount paid in attorney’s fees and had the case expunged based on inconsistencies between actual petition and electronic petition filed, and based on the testimonial of Patricia Storay.  Court used power granted from § 105 and§ 107 of Bankruptcy Code in the ruling.

In re Joyce (Delaware, 1/6/2009)

Robert F. Joyce filed a voluntary petition for a CH 7 Bankruptcy on 10/13/03, which was discharged on 1/21/04.  He claimed that he was filing the petition, in-part, due to a loss of $1,285 from a loan scam he applied for out-of-country because he was already in financial trouble and wanted to avoid bankruptcy.  He argued the scam sent him deeper in debt and that the false company had also stolen his identity.  However, Joyce admitted multiple times that all creditors listed on his Schedule F on the bankruptcy petition had been “personally incurred” and not a result of the fraud.  On 9/2/08, Joyce filed the motion asking the court to expunge his bankruptcy from public record.  The Court ruled against Joyce, citing that no other charges were made that hurt Joyce’s finances after he gave his information to the loan scam, and all charges were personally incurred as part of his voluntary bankruptcy filing prior to the scam taking place.

Do I Have to Pay Taxes on This? 1099-C's After Bankruptcy

A common question I receive around this time of year from bankruptcy clients involves the receipt of a 1099-C from a creditor that was discharged in their bankruptcy. This can be a pretty stressful piece of mail to receive, especially as that client has already gone through the bankruptcy process to wipe their slate clean only to face the prospect of an obligation to the IRS. 

Generally speaking, a 1099-C is a tax form sent to you from a creditor that forgave debt of more than $600.00 to you in that taxable year. That creditor (and you) are required to report that information and income to the IRS. For individuals that have discharged that debt in bankruptcy, there typically is no tax liability for this amount. That does not mean, however, that you can just ignore the 1099-C.

What should you do with a 1099-C for debt that was included in bankruptcy? In addition to filing your form 1040 to the IRS, you also need to attach Form 982 to your tax return. This form notifies the IRS that you are not adding the cancelled debt from the 1099-C to your gross income on your tax turn because of the bankruptcy filing.

If you receive a 1099-C for debt that was secured by property (i.e. a car loan or mortgage) the issue becomes a little more complex. Yes, more likely than not you can exclude the forgiven debt from your gross income. The IRS, however, still will treat the cancelled debt if the house is foreclosed on, as though you sold the house. In other words, the IRS will want to know if there was a gain or loss on the property. Generally speaking, a taxable gain happens when you own property and that property sells for more than you purchased it for or more than your tax basis. This can result in having to pay taxes to the IRS.

Going through bankruptcy can be a difficult and frustrating experience. The benefits of a successful bankruptcy, however, can be significant. Don’t let an errant 1099-C hamper your bankruptcy discharge and put you right back into debt.

If you receive a 1099-C for a debt included in your bankruptcy, contact us for a free consultation on the possible impact that document may have on your income tax returns. 

Famous Bankruptcies: Abraham Lincoln, Bankruptcy Debtor

I was working on a presentation for a local seminar the other week on the basics of bankruptcy. I covering the different types of bankruptcies, I was trying to provide a small sample of "famous bankruptcies;" or bankruptcies of people that, by common perceptions, were/are considered to be successful. As a history major in college, I dove into the project head first and was very surprised at the results that I found.

So who filed? Presidents? You bet (and more than one!). Actors? Absolutely. Musicians? Of course....

I thought this would be an interesting topic to write about on this blog (also as an attempt to get back in the saddle of updating this). I'm going to try to do a regular post on the details of at least one famous bankruptcy.

So, without further adieu:

ABRAHAM LINCOLN, BANKRUPTCY DEBTOR

Ask anyone in the world to name three US presidents and Abe Lincoln more than likely will be one of them.

Ask any American to name the three most important US presidents and I'll be that he will come up again.

The image of a stoic, giant, man with anecdotes, wisdom, and the leadership to guide our nation through arguably its most trying times is seared into our collective conscious.

But....

He filed for bankruptcy. 

Lincoln's bankruptcy filing occurred in 1833; long before the time of PACER and electronic records. I'm sure you can imagine that the existing records are somewhat hard to come by. Here is what I can piece together:

In 1833 Lincoln and an Army corporal by the name of William Berry purchased a general store in New Salem, IL. Lincoln signed a note with the seller of the business to finance its purchase. The business, however, competed with a much larger, well established company, and soon folded.

Within the next year, the note became due and Lincoln was unable to pay. His possessions were soon possessed by the local sheriff. Soon, Corporal Berry died and Lincoln assumed his 1/2 of the debt. Lincoln filed a form of bankruptcy that existed at the time and had to make payments on the debt. Some say he paid for seventeen years. Others argued it wasn't quite that long. 

Shortly after the bankruptcy filing, Lincoln obtained a job as a postmaster and then as a surveyor. I would say that he recovered from his "National Debt," as he liked to call it, rather well.

A Little Shameless Self-Promoting - Home Buying Seminar - FREE JANUARY 25

On Saturday, January 25, 2014 I've been asked to present at a home buyer's seminar in Pontiac. The focus of the seminar is to address potential buyers that think they cannot qualify to purchase a home. Sessions will be taught on the following topics:

(1) Credit Reporting and How it is Caluculated
(2) Consumer Bankruptcy Basics (this is my session)
(3) HUD Housing
(4) New FHA Program to help distressed buyers
(5) MLSDA Loans.

For a potential homebuyer, there will be a treasure trove of information to assist you in the daunting process of buying a home.

For the real estate professional, it this seminar is an excellent opportunity to network with other professionals in the area --- and you might learn something that you didn't know!

Did I also mention that there is free breakfast?

Hope to see you there! Sign up here.