Record Corporate Profits Are Not Lowering Unemployment Rate

U.S. corporations are making record profits quarter after quarter, yet unemployment seems to be stuck at a devastatingly high rate. Why aren’t these financially flush big businesses hiring?

I’ve been writing a string of blogs about how tax debts are dealt with in bankruptcy, and I’ll get back to that after today. This is the time of year when the nation’s major corporations report their 3rd quarterly profits, and so I found myself scratching my head about the disconnect between their huge profits and their lack of hiring. So I read a number of news stories and editorials and this is what I got out of them:

1.  Big businesses have gotten to be more “productive,” in the sense of producing more goods and services with less labor. That has happened partly through investments in labor-saving technology and partly by requiring employees to work harder and faster for the same pay. With the cut-throat labor market, companies don’t need to increase salaries to retain or replace their employees.

2.  Profits have increased because a larger percentage of sales for large U.S. corporations have been overseas. Around 40 per cent of their profits are from foreign sales. For many companies, sales are growing modestly in the U.S. while growing much faster elsewhere, especially in the “emerging markets” of China, India, and South America.  

3.  Relatively strong overseas sales come with job growth overseas instead of here. According to the U.S. Commerce Department, in the past decade, U.S.-based multi-national corporations added 2.4 million jobs outside the country while cutting 2.4 million jobs here. Jobs naturally grow where sales are growing–someone has to take customer orders at the 3,000+ KFCs in China! But of course there’s also increased foreign outsourcing of work that used to be done here, from manufacturing to computer programming.

4. Normally when businesses are more productive, resulting in more profits, they tend to expand, thus creating more employment opportunities. But this has not been happening for three reasons.

a. With the double-whammy of very high unemployment and loss of home values, U.S. consumers either don’t have the means or the attitude to spend money, so companies are leery about expanding to increase production.

b. The international business environment—particularly the European sovereign debt crises in Greece, Italy and elsewhere—is making big business cautious.

c. Political gridlock in Washington, D.C. makes business planning very difficult. With the Congressional deficit-reduction “super committee” scheduled to issue its report very shortly, big businesses have been sitting tight to see if this “super committee” will come up with its momentous compromise, and what it’ll consist of.

The bottom line: big businesses don’t need to hire to produce the goods and services they are producing, at least within the U.S., and they don’t want to expand and hire here because of lackluster consumer demand and high uncertainty in the world economy and in domestic politics.

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Four Hoops to Jump Through to Write Off Income Taxes in Bankruptcy

The conditions you have to meet to write off an income tax debt actually make sense. And understanding those conditions is a lot easier if you understand the sense behind them.

In my last blog I introduced the four conditions for discharging taxes in a Chapter 7 “straight bankruptcy,” and said I’d explain them in this blog today.

This is made easier by the fact that there is a single principle behind all four of these conditions: bankruptcy law believes that taxpayers who pretty much follow the tax laws should be able to write off their tax debts just like the rest of their other debts, after first giving the IRS (or other tax authority) a sensible amount of time to collect the taxes.

How long is this sensible amount of time? How much of an opportunity do the tax authorities have to collect before you can discharge the tax debt? Each of the four conditions measures this amount of time differently, based on 1) when the tax return for the particular income tax was due, 2) when the tax return was actually filed, 3) when the tax was “assessed,” and 4) whether the tax return that was filed was honest and therefore reflected the right amount of tax debt when it was filed. You must meet all four of these conditions, all four of these measures of time.

Taking them one at a time:

1) Three years since tax return due: Every income tax debt has a fixed point in time when its return had to be filed. That date is extended by a certain number of months if you asked for an extension, but it’s still a fixed point in time, one that can be easily ascertained. So this first condition gives the tax authorities three years to collect, three years from a fixed point not affected by your actions (the timing of filing the return) or their actions (audits, legal disputes).

2) Two years since tax return actually filed: In contrast, this is a time period triggered by your own action. Notice above when I stated the overall principle at work here, I said you must “pretty much” follow the tax law. Thus you can file a tax return late and still be able to discharge the debt if at least two years has passed since you filed the return.

3) 240 days since assessment: Assessment is the tax authority’s formal determination of your tax liability, usually by its review and acceptance of your tax return. Normally an income tax is assessed within a few weeks that it is received, so the 240 days since assessment usually passes way before the above three-year or two-year time periods. But the law has to account for the less common situations when assessment is delayed. So, when a tax is subject to a lengthy audit or litigation, or an “offer-in-compromise” (a taxpayer’s formal offer to settle), and the three-year and two-year periods have passed, the tax authority still has 240 days after assessment to chase that tax debt.

4) Fraudulent tax returns and tax evasion: This last condition essentially says that none of the above time periods are triggered at all if you are intentionally dishonest on your tax return or try to avoid paying the tax in some other way. If you are cheating on your taxes then the tax authority has no opportunity to collect the debt, so you cannot discharge the debt, no matter how old the tax is.

If your tax debt can jump through these four hoops, you should be able to discharge that tax in a Chapter 7 bankruptcy.

But what if you owe taxes which do not meet these four conditions? What if some of your taxes do but others do not? Or what if the IRS has recorded a tax lien? Or if a lot of the taxes came from operating a business, or are not income taxes but some other kind? I’ll tell you about these situations in my next blogs.

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Writing Off Income Taxes with a “Straight Bankruptcy”

You don’t always need to file a Chapter 13 case—with its 3-to-5-year payment plan–to deal with income tax debts. Thinking that you do is a myth, alongside the broader myth that “you can’t write off taxes in a bankruptcy.” Both have a kernel of truth, which is why they persist. It’s true: some taxes cannot be discharged (legally written off) in bankruptcy. But some can. And it’s true: Chapter 13 is often an excellent way to solve tax problems. But that does not necessarily mean it is the best for you. Instead Chapter 7 might be.

Chapter 13 tends to be the better tool if you owe a string of income tax debts including relatively recent ones. Why? Because in this situation Chapter 13 gives you the best of both worlds. First, if you owe recent income taxes which cannot be discharged, you get lots of advantages under Chapter 13, including paying less by avoiding most penalties and interest. That can be a huge savings, especially if you can afford only relatively small payments. Second, if you have older back taxes, these are also wrapped into the Chapter 13 plan, often without you paying any more into your plan, then they are discharged at the end of your case.

But you DON’T NEED the best of both worlds if all or most of your income tax debts are dischargeable. Then Chapter 7, the straightforward “straight” bankruptcy is enough.

So, WHAT ARE the conditions for a specific income tax debt to be discharged in Chapter 7? How are you going to know if Chapter 7 will discharge all or most of your taxes so that it is the right option for you?

Some of the conditions for discharge of taxes are quite straightforward. Some are more complicated. And as you’ll see, some are even purposely vague. So unfortunately it’s not as simple as plugging a particular tax debt into a clear formula to see if it is dischargeable. Determining whether a particular tax debt will be discharged requires the careful judgment of an experienced attorney.

I’ll just list these conditions for discharging income taxes here, and then explain them in my next blog. Don’t be surprised if they sound confusing in this list. It’s true: anything having to do with taxes tends to be complicated!

To discharge an income tax debt in a Chapter 7 bankruptcy case, it must meet these conditions:

1) Three years since tax return due: The applicable tax return must have been due more than three years before you file your Chapter 7 case. And if you requested any extensions for filing the applicable tax returns, you have to add that extra time to this three-year period.

2) Two years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.

3) 240 days since assessment: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.

4) Fraudulent tax returns and tax evasion: You cannot have filed a “fraudulent return” or “willfully attempted in any manner to evade or defeat such tax.”

You can see that these are begging for some clarification. For that please come back to read my next blog. Or else call to set up a consultation with me. If you have substantial tax debts, you should definitely get some thorough personal advice. Know your options so you can make an informed choice, about bankruptcy and otherwise.

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Taxes and Bankruptcy–Debunking a Hardy Myth

No wonder people think “bankruptcy can’t help me with my tax debt.” Even attorneys sometimes perpetuate the myth.

A few days ago I saw a video of a bankruptcy attorney being interviewed in what amounted to be an infomercial. He was asked by the interviewer whether there were some debts that can’t be “touched” in a bankruptcy:

Attorney: “Absolutely. Things like child support, alimony, uh, tax debts, student loans. Those generally aren’t dischargeable.”

Interviewer:  “So the government’s gonna help you eliminate some of the debt in a bankruptcy. But not the debt to them.”

Attorney: “Not theirs, of course!”

Lumping tax debts in with child support and alimony—which indeed cannot be legally written off, or discharged—is just plain wrong. For him to say that tax debts “generally aren’t dischargeable” while including it with other debts that are never dischargeable, or in the case of student loans very rarely dischargeable, is at best very confusing.

And no question, the merger of taxes and bankruptcy can be confusing, because each of these are rather complicated areas of law. Misinformation doesn’t help.

In my next few blogs, you’ll get some solid answers about what taxes can be discharged and what can’t. The fact is that bankruptcy can discharge taxes of many types and in many situations. Sometimes ALL of a taxpayer’s taxes can be discharged, or most of them. But there ARE significant limitations, which I will explain carefully.

But right now maybe the most important thing to understand is that even as to the particular taxes that may not be discharged, a bankruptcy still usually provides huge advantages in dealing with those taxes. So besides the possibility that you will be able to discharge some or all of your taxes, bankruptcy can also:

1. Keep the taxing authorities from garnishing your wages and bank accounts, and “levying on” (seizing) your personal and business assets.

2. Stop them from gaining greater leverage against you, through tax liens and piling on greater penalties and interest.

3. Avoid forcing you to pay them monthly payments based on totally unreasonable policies (such as giving no consideration to most of your other legal obligations), all the while penalties and interest continue to accrue.

Overall, bankruptcy gives you leverage against the IRS, or state or local taxing authority that you cannot get any other way. It gives you a lot more control over a very powerful class of creditors. And your tax problems are resolved as part of your whole financial package, so you don’t find yourself working hard to deal with your taxes while worrying about being blindsided by other creditors.

I’ll explain all this in my next blogs. Call me in the meantime if you can’t wait, or you know you shouldn’t wait. There is no kind of debt that needs more careful personal attention and advice than tax debts.

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Federal Law Protects Renters from Foreclosure

A temporary federal law gives renters some protections against getting evicted from their homes when a bank forecloses on their landlord. The “Protecting Tenants at Foreclosure Act” is short—only two pages—and simple: after the completion of a foreclosure of a home or apartment building, the new owners of the property must allow  renters to continue staying there for either 90 days or through the end of their lease, whichever is longer. So even with a month-to-month rental, the renter would be allowed to stay for 90 days after the foreclosure. Of course have to pay rent and fulfill their side of bargain while they remain on the property.

Why has this been a problem? The public focus during this long foreclosure crisis has been on the millions of homeowners losing their single family homes. But many of these homes are in fact rented out to others. And there are also many foreclosures of multiunit residences—everything from duplexes to apartment buildings. In fact research by the National Low Income Housing Coalition estimated that “renters represent as many as 40% of the American families who will lose their homes in this crisis.”

While homeowners have long had an established set of protections during the foreclosure process, renters have had virtually none. Renters often had no idea that their landlord had fallen behind on mortgage payments and that their home was being foreclosed.  They found out only after the foreclosure sale had occurred and the bank or the new owner shocked them with eviction papers. The “Protecting Tenants at Foreclosure Act” provides at least a modest cushion of time in almost all situations, and the right to the full term of their lease for tenants who bargained for such longer leases.

This straightforward law contains very few exceptions. It does not apply if the tenant is also the owner of the property being foreclosed, or the owner’s spouse, child, or parent. The rental agreement must be genuine, and must provide for payment of rent at about fair market value (or with a legitimate governmental subsidy). Also, if after the foreclosure the new owner intends to live in the home as his or her primary residence, then the tenant must surrender the property after 90 days even he or she has a longer term.

This law is temporary in that it was to expire at the end of 2012. Last year’s financial reform law has extended that expiration to the end of 2014.

Maybe the most important part of the “Protecting Tenants at Foreclosure Act” is that it sets a threshold standard, but also explicitly states that it shall not “affect the requirements… of any State or local law that provides longer time periods or other additional protections for tenants.” During these last two years many states have recognized the need for tenant protections. If you are a tenant in a house or apartment that you are afraid is being foreclosed upon, contact our office to set up a consultation to discuss this and any other financial concerns you may have.

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Surprising Supporters of Increased Taxes on the Rich

Not only do the majority of the wealthy think that they should be taxed more, so do a majority of Republicans. These are the surprising conclusions of two recent polls.

When the second-richest American, Warren Buffett, wrote an op-ed column in the New York Times a few months ago advocating increased taxes for himself and everybody else with an annual income over $1 million, that wasn’t such a big surprise. He has been pushing similar policies for quite a while. For that matter so has the # 1 richest American, Bill Gates.

But that column by Buffett generated such a firestorm of opposition that it would have been easy to think that he and Gates don’t have much support among their wealthy colleagues.  Not true, according to a survey of millionaires taken during October 2011 by the Spectrem Group, “the premier research and consulting firm in the wealth and retirement industry.” More than 67 percent of those millionaires surveyed said that the U.S. economic situation would be improved by increasing taxes on those with more than $1 million in annual income, pretty much what Buffett is advocating.

Well, OK, that’s surprising. But maybe they’re so rich they can easily afford to pay taxes. Or maybe those in the top 1% being made infamous by the Occupy Wall Street folks are not as greedy as they are being made out to be. Or maybe just not that anti-government. As Mark Cuban, another of the ultra-rich, has said straight out in his own blog a couple months ago: “Pay your taxes. It’s the most Patriotic thing you can do.”

Now Gates, Buffett, and Cuban may not exactly be representative of all wealthy Americans. And who knows how reliable that Spectrem Group survey is. But if true, it’s noteworthy that a full two-thirds of millionaires think that if their taxes were higher that would help our economy instead of hurt it.

But what about everyday Republicans? I would have thought that a very strong majority of Republicans would oppose “increasing the taxes paid by people who make more than one million dollars a year.” This was the wording of the question asked in a CNN/ORC poll taken in mid-October.  But instead about 56% of Republicans favored increased taxes for these high-earners, while 43% opposed them.

I don’t pretend to know what this means. It may be as simple as an attitude—even among Republicans–of “tax the other guy to plug the deficit.” There are only about 250,000 U.S. households with incomes of more than a million dollars, so they don’t get a lot of votes in a national poll. Whatever the cause for this willingness for a selective tax-increase among the Republican electorate, it seems to reveal a disconnect between them and their single-mindedly anti-tax representatives in Washington.

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Some Student Loan Borrowers Get Some Relief

Starting in 2012, about 1.6 million student loan borrowers will be able to make smaller monthly payments, and make less of these payments before the remaining balances are forgiven. On October 26, President Obama announced these improvements to the Income-Based Repayment Plan.

The changes are simple.

1. Monthly payments:  Under the Income-Based Repayment Plan, payments are capped “at an amount intended to be affordable based on your income and family size.” The payment amount has been 15% of your disposable income. It is now going down to 10% of disposable income. (Click on the above link for more details on how to determine your disposable income and payment amount.)

2. Repayment term:  The current 25-year repayment period is being shortened to 20 years.

Although 20 years is still a very long time, if your income is low enough the monthly payments can be very low, or even $0, meaning that you may not have to pay very much during those 20 years.

Unfortunately, this new improved Income-Based Repayment Plan only applies to people who 1) graduate in 2012 or later, 2) took out their first student loan no earlier than 2008, and 3) will be taking out at least one new federal student loan during 2012 or later. It’s clearly designed for current and future student loan borrowers.

But even if you don’t qualify for the 10%/20-year improved version, the older 15%/25-year Plan can also be very helpful—saving you money right away in your monthly budget, and also potentially saving a lot of money in your lifetime budget.

However, there ARE other limitations: none of this, including the Income-Based Repayment Plan, applies to private student loans. You need to contact your private lender to find out your options. And even if you do have a federal student loan, you cannot be in default on the loan to qualify for this Plan. To find out what type of student loans you have and their default status, go to the National Student Loan Data System for this and related information.

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Refinance Your Mortgage No Matter How Far Underwater It Is

One million more homeowners have just become eligible for refinancing at the current very low interest rates. Until now, the federal Home Affordable Refinance Program (HARP) has been limited to homeowners with mortgages of no more than 125% of the value of their homes. By way of example, for a home currently worth $200,000, the mortgage could be no more than $250,000. Now that 125% limitation has been eliminated, allowing homeowners more deeply underwater to qualify for HARP refinancing. So some people who have not been able to take advantage of the low interest rates will be able to do so and get the resulting lower monthly mortgage payments. This change should especially help homeowners in those parts of the country hardest hit by reduced home values, where a large percentage of homeowners have been cut off from being able to use HARP.

To qualify under the revised refinancing:

1. You must have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, which include about half of all U.S. home mortgages. You can find out whether yours is by looking that up online at Fannie Mae and Freddie Mac or calling 800-7FANNIE or 800-FREDDIE (8 am to 8 pm ET for both numbers).

2. Your mortgage must have belonged to either of these two institutions by no later than May 31, 2009.

3. You cannot have been late on any of the mortgage payments during the last 6 months or on more than one payment in the last 12 months.

4. You can’t have already refinanced through HARP.

The program continues to be voluntary for the mortgage lenders, so there are additional incentives for them. Lenders have been accused of being extremely picky about income documentation and home valuation under HARP, apparently fearing that they would have to buy-back the new mortgages being sold to Fannie Mae or Freddie Mac. So the new changes eliminate most of that risk. As a result, the application process should be much easier and less expensive for borrowers.

Detailed rules are expected by the middle of November, with lenders ready to implement the revamped program starting around December 1.

 

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Avoid the “Presumption of Fraud” for Using Credit Cards during the Holidays

Paying for the holidays with credit cards, even at a relatively modest amount, can mean that you will have to pay back those purchases if you file a bankruptcy. That could happen even if at the time you made those purchases you fully intended to repay that credit—in other words, even if you weren’t planning to file a bankruptcy.

The Bankruptcy Code contains some very specific rules about the consequences of using credit to buy “luxury goods or services” during the months before filing a bankruptcy.

If you use a credit card—or any other type of consumer credit—to buy at least $500 of consumer “luxury goods or services” through any single creditor within the 90 days before filing bankruptcy, there is a “presumption” that the debt incurred this way is nondischargeable—that it can’t be legally written off.

Don’t be fooled by the word “luxury” in that rule. That means anything not “reasonably necessary.” Arguably anything not used for survival in not “reasonably necessary.” So even modest Christmas and holiday gifts could be considered “luxuries” for this purpose.

Similar rules apply to the use of cash advances, except that the trigger dollar amount is $750 per creditor, and the period of time is within 70 days before filing bankruptcy, with the same “presumption” that the debt would not be dischargeable.

You may be thinking that these rules only create presumptions, which can be defeated. So that you can still discharge these kinds of debts by showing that you in fact you had every intention of paying them at the time you used the credit. Yes, that true, in theory but not likely in practice. First, coming up with that kind of evidence—proving your intent at some point of time in the past– is usually not easy. And second, and more important, the high cost to bring that kind of evidence to court usually makes trying to do so not worthwhile. Usually the amount of attorney fees it costs you to fight the issue is more than the amount being fought about.

What all this means that if during the holidays you use a credit card or other consumer credit exceeding these dollar limits, and then file bankruptcy within the applicable 70-day and 90-day periods, most likely you will still have to pay for whatever credit was incurred during those periods. You can avoid these presumptions by waiting to file the bankruptcy until after those periods of time have expired, but that’s not always possible. At best you’ll delay getting your bankruptcy filed, and so will delay the eventual resolution of your financial problems. And even if you wait, the creditor can still try to show your bad intention. Avoid all this by not using your credit cards and/or lines of credit whenever there is a sensible chance that you’ll have to file a bankruptcy in the near future.

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Pre-Holiday Warning about Credit Card Use for Gift-Giving

Especially if you’re thinking about filing bankruptcy, resist the urge to rack up a big credit card bill for Christmas and other holiday gifts.  Otherwise you may find your hands tied about what debts you can write off in bankruptcy or even when you can file your case. But before getting to these legal reasons, there are some more basic ones.

When money is tight, your anxiety about paying for gifts and for special meals clouds the holidays. If you have room on your credit cards, and very little disposable income, the temptation to use the credit cards is just about irresistible. We live in a rather materialistic culture, so when we express our love and affection through gifts we tend to let their price carry too much meaning. We feel that an expensive gift shows how close we are to someone. We also let the gifts we give, and their price, define us and our own worth. We’re no good if you can’t give our loved ones nice gifts. That’s especially true with our spouse or that someone special, and with our kids. If we can’t give our sweetheart something really special, if we don’t fill under the Christmas tree for our kids, then we feel like we are not a very good spouse, friend, or parent. We don’t want to disappoint them, and have them be disappointed in us.

This feeling may be especially intense if there is tension in the marriage, or within the household, often the case when there are intense financial pressures. It can be a vicious cycle.

In our hearts we know that the price of gift is not a true measure of the extent of our love, and certainly that gifts don’t buy love. To help you follow your wiser impulses, here are three suggestions.

First, give gifts appropriate to your financial circumstances, no matter how modest those gifts may be.  That is the only responsible way, and in fact shows your love—especially to family members—a lot more than if you gave gifts you could not afford.

Second, put the energy that you would put into fretting about how to pay for a relatively expensive gift instead into creatively thinking about an appropriately priced perfect gift. Come up with something that reflects the connection between the two of you, one that the person will enjoy but also shows that you really put your heart into it.  

Third, whenever possible communicate honestly with your loved ones about your financial constraints. This has to be done the right way, preserving your own dignity, and appropriate for the relationship—different for extended family, spouse, your children. Instead of being negative, it can be a constructive conversation about priorities, honesty, and what love is really all about.

I know, this is lots easier said than done.

To help motivate you, in my next blog I’ll give you some legal reasons why piling holiday charges onto your credit cards can tie your hands in ways you don’t expect.

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