Bankruptcy requires listing all debt and filing all tax returns.

Listing all creditors is vital to the success of a bankruptcy case.  So is filing all required tax returns on time.  If you fail to file a tax return you might not be aware you owe the IRS money, so it would be easy to mistakenly omit that creditor from your bankruptcy case.  Even debt that will not be discharged should be listed, including certain tax debt, so that a claim can share in any distribution paid to creditors by the bankruptcy estate.

Let’s take a look at what happens in two situations, one where debtor does not file a tax return on time, and two, where a creditor is not listed in bankruptcy.  These examples are limited to the laws of the Southern District of Illinois Bankruptcy Court.  Other districts might treat these situations differently and one should always consult a local attorney for advice in your state.

File your tax returns on time.

The first case involves failing to file an income tax return on time.  When the debtor does not file a return, the IRS is permitted to file a substitute return for the debtor.  This type of return may result in a tax liability owed to the IRS.  Under certain circumstances a debtor can obtain a discharge of tax debt, however, there is an exception to this rule if a tax return was not filed.  See 11 U.S.C 523(a)(1)(B)(i).

The question whether a substitute return filed by the IRS is the same as a return filed by the debtor has been answered by the Seventh Circuit Court of Appeals.  In order to be a return for bankruptcy discharge purposes, the document must meet four conditions.

1.  It must intend to be a return;

2.  It must be signed under penalty of perjury;

3.  It must contain enough information to determine whether a tax liability is owed; and

4.  It must represent an honest and reasonable attempt to satisfy the law.   See In re Payne, 431 F.3d 1055 (7th Cir. 2005).

A substitute return is not signed by the debtor, therefore it is not considered a return under section 523.  Therefore, any tax due for that year is not dischargeable.  So says the Court in In re Ranney (S.D. IL 05-3251).

Non-dischargeable debt can be paid in a chapter 13 if a claim is timely filed, but not if a claim is late.

The next situation involves a late filed claim where the creditor was not listed on the bankruptcy.  Creditors on a bankruptcy case receive notice at the name and address listed by debtor on the schedules.  Creditors who file claims on time can share in the money paid out on an asset case.  Even debt that otherwise would not be discharged by the bankruptcy can be paid, all or in part, if a timely claim is on file.  But a creditor who is not listed on the case will not receive notice of the requirement to file a proof of claim.  Without a timely claim, a creditor will not get paid any money from the bankruptcy case.

Generally, most creditors only have 90 days after the first scheduled Section 341 Meeting of Creditors to file a claim.  Different circumstances present different time requirements for filing a claim.  For example, government entities, including the IRS, generally have 180 days to file a claim; the debtor has an additional 30 days to file a claim for a creditor if a creditor fails to do so; and Bankruptcy Rules 3002, 3003 and 3004 present additional time to file certain claims.  Those claims are considered timely filed and can be paid regardless of whether the debt is dischargeable or not.  However there are no exceptions for payment of an untimely claim.  So says the Seventh Circuit in Matter of Greenig, 152 F.3d 631 (7th Cir. 1998).

A creditor who is unaware of a bankruptcy case is not likely to file a claim on time without knowing of these strict time limits.  The Southern District of Illinois considered such a situation where the IRS was neither originally listed nor notified of the bankruptcy and ultimately filed a late claim.  The Court in In re McCartney (S.D. IL 10-30638) gave thoughtful consideration to due process, bad faith and equity arguments in ruling the Court did not have authority to allow payment on an untimely claim and was required to sustain an objection to that claim.  The Court noted that

The debtor should list all creditors and file timely claims if necessary so debts get paid or discharged.

As harsh as the rules appear, the debtor has the ability to list creditors so they receive notice in time to file a claim.  After all, the debtor is the one person who knows, or should know, who is owed money.  Failure to list a creditor can result in that debt not being discharged under 11 U.S.C. 523(a)(3)(A) if that creditor does not have time to file a claim.  It is in the debtor’s best interest to include all debtors in order to maximize the payment to non-dischargeable debt and to obtain the full benefit of a discharge where possible.