Brenda Posner wrote:

- quote -

Not addressing the bankruptcy: IF he is the one bringing the
malpractice suit, then isn't this moot as any income from it
would presumedly be due to a personal (and physical) injury
and thus excludible from income tax per IRC 104?

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"Dick Adams" <rdadams[at]smart.net> wrote:

- quote -

I don't think so. AFAIK, the only tax claims dealt with in
a Chapter 7 are prepetition.

--
Phil Marti
Clarksburg, MD

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"Brenda Posner" <posner[at]shameless.com> wrote:

- quote -

You must be leaving something out, like other liquid assets
other than the 18,000. If he has enough that can be sold to
clear the debt, thats what will happen and no bankruptcy
will proceed. If all he has that is not exempt from being
sold to pay the debt is the 18,000, he's still short 82,000.
If thats the case (I'm assuming a Chapter 7) the remaining
debt would be eliminated and no tax owed.

Mike Lewis, CPA

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Depends. My understanding of the interaction between tax
and bankruptcy is as follows - if you really need answers on
which you can rely, please go pay an attorney for an hour's
worth of advice - remember, you're getting free advice here,
and as a general rule, you get what you pay for.

As a general rule, when a debtor files bankruptcy a second,
fictional legal "person" is created - the bankruptcy estate.
The estate gets its own EIN and is a separate person for
tax purposes. As a separate person, the estate will be
taxed on its income (e.g., the income the estate receives in
the process of operating or liquidating the assets it took
over from the debtor). These taxes will come out of the
proceeds of the estate first, before any other creditor gets
paid (except, as a general matter, for the secured
creditors).

In parallel, your fiance continues to be a taxable person
and will pay taxes on any income he earns during the
bankruptcy period (e.g., wages) - keep in mind, if he had
any investments those became assets of the estate and the
income from them will be taxed to the estate during the
pendency of the bankruptcy.

Since the two run in parallel, the filing by the estate will
not, in general, have anything to do with either your
fiance's filings or your joint filings during the pendency
of the bankruptcy.

Once the debtor receives a final discharge, however, the two
parallel "persons" are collapsed and the now ex-debtor
inherits all of the tax attributes of the estate. Since
taxes on income generated by the estate during the pendency
are supposed to come out of the proceeds of the estate
first, there should not be any left-over tax liability.

Finally, if your fiance does have a med-mal suit, amounts
received therefrom should not count as taxable income in the
first place - amounts received on account of a physical
injury are generally excluded from gross income under sec.
104.

For further information, and to verify what I've said here
(which you must do if you intend to act on it), the IRS
should have a publication that talks about the interaction
of tax and bankruptcy, and if significant amounts of money
are at risk, you really do need to talk to an attorney who
can get all the facts and do a proper research on your
particular case.

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"Brenda Posner" <posner[at]shameless.com> wrote:

- quote -

OK, I've read it three times, and I give up. Just exactly
how would this be a disaster?

Without research I assume that if there were proceeds from
the malpractice suit they would be treated the same as the
proceeds from any other litigation. Economic damages would
be nontaxable and punitive damages would be taxable.

--
Phil Marti
Clarksburg, MD

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"Brenda Posner" <posner[at]shameless.com> wrote:

- quote -

Do not worry. There is an order of preference of payments.
Secured Creditors
Administrative Costs <includes recovery costsGap Creditors
Wages owed up to a certain limit
Benefits owed up to a certain limit
Taxes
Unsecured Creditors

The taxes on the recovery will be paid before the unsecured
creditors are paid. If everyone is paid in full and there
is a surplus <highly unlikely> , the taxes were already paid
by the estate.

Dick

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My husband to be just filed a Chapter 7 bankruptcy. His
debts were just over $100,000 and he had some uncollectable
receivables of $18,000. At the hearing, he was asked about
any pending litigation and he said he felt he had a medical
malpractice suit, but he couldn't find an attorney to take
it on contingency fee.

The hearing was three weeks ago today and the trustee has
already collected the receivables. And my fiance just got
papers to sign for the malpractice suit.

My concern is that this trustee is going to collect
sufficient funds to wipe out the debts and even put money
into my fiance's hands. If it were to be taxable, that
would be a disaster.

Can you be taxed on the outcome of a bankruptcy?

Brenda

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