U.S. States Hardest Hit by Bankruptcies, Unemployment and Foreclosures

In Q1 2010 and April 2010 the state hardest hit by financial crisis as determined by bankruptcies per capita, foreclosures and unemployment was Nevada. Nevada residents came in top 2 for all three categories as a percentage of population and houses for the state.

Another state hard hit by financial crisis was California which in terms of total bankruptcies filed in Q1 2010 ranked 1st among the States. California also ranked poorly for foreclosures and unemployment with 1 in every 192 houses being foreclosed upon, and an April 2010 unemployment of 12.6 percent.

While Florida ranked top 5 for bankruptcy, foreclosures and unemployment in Q1-2010 and April 2010, its bankruptcies ranked top 5 as a total and not per capita. Since Florida is among the top 5 most populous states, it is clear the high population has a statistical bearing on the number of bankruptcies.

The financial numbers demonstrate the Western U.S. seems to have been harder hit by financial crisis than the Midwest and Eastern seaboard states. Bankruptcy, foreclosure and unemployment are not the only economic indicators to measure economic trends, but they are strong ones in the sense they reflect the amount of financial difficulty a population is experiencing quite well.

Of the states most protected from financial crisis in early 2010  were North and South Dakota. North Dakota had the lowest average numbers with April unemployment of 3.8%, 2.2 per capita bankruptcies and 1 in every 5911 homes being foreclosures. South Dakota also fared well with an unemployment of 4.7%, 1 foreclosure per every 1975 housing units, and a bottom 5 bankruptcy rating of 2.2. bankruptcies per 1000 people.

These financial statistics reveal that economies heavily dependent on tourism, real estate and services suffered more from economic hardship than did economies with agricultural and resource bases economies such as North and South Dakota. According to a June 30, 2009 Forbes article by Joshua Zumbrun, North Dakota was 1 of only 2 states to have  a state budget surplus in 2009.

Unemployment, per capita bankruptcy filings and foreclosures do not represent the whole population demographic and economy for a state, but they do indicate how state residents are doing on average. Other statistics such as the size of state budget deficits,  population decline or slowed growth, corporate relocations etc. also serve to show how well a state economy is doing at the macro-economic level.

In terms of macro-economic performance North Dakota also fared well with a 2008 state economy that grew by 7.3% according to the U.S. Bureau of Economic Analysis (BEA). As also indicated by the aforementioned statistics, the BEA reported Nevada scored in the lowest 2008 GDP quintile  with negative .6% GDP growth. California and Florida also scored poorly in this category however California did not experience negative GDP growth in 2008 pointing toward some resilience in its economy.

Sources:

1. http://bit.ly/bS2pRL (American Bankruptcy Institute)
2. http://bit.ly/122JSA (Realtytrac)
3. http://www.bls.gov/lau/ (U.S. Bureau of Labor Statistics)
4. http://bit.ly/cNza9U (Credit Cards.com)
5. http://bit.ly/K3uUb (Bureau of Economic Analysis)

How Does Filing Bankruptcy Affect IRS Tax Debt

Filing for bankruptcy may or may not affect Internal Revenue Service (IRS) debt depending on 1) the type of bankruptcy, 2) judicial decisions, 3) IRS regulations and 4) Documentation filed with the IRS by the individual or persons filing for bankruptcy.

There is no one answer for how bankruptcy affects taxes because there are multiple situations and rules that affect money owed. In light of this, a methodology for assessing tax due to IRS is discussed hereafter. Numerous factors can affect whether or not, and how much tax a bankruptcy petition filer may owe in taxes. Some of these factors are listed below:

• Ability to repay as assessed by the IRS
• Formal discharge of tax debt by bankruptcy court
• Compliance with tax code and bankruptcy regulations
• Taxable bankruptcy exempt assets owned by the filer
• Carrying out of tax and bankruptcy related filings

Direct tax benefits of filing for bankruptcy

Bankruptcy can affect IRS debt by legally demonstrating the inability to pay taxes. This inability to pay taxes can be determined by both the bankruptcy court and the Internal Revenue Service.

Filing for bankruptcy can also affect IRS debt by reducing the total amount of assets one owns that can be used for the purpose of paying taxes depending on the priority of debt in order of repayment.

Since bankruptcy is a second chance financially, taxes that do not enable this second chance in principle may be exempt from repayment. Some of the ways filing for bankruptcy may affect IRS debt are as follows:

• May redistribute payment obligations
• Taxes due can be negotiated with the IRS
• May reduce taxable value of personal assets
• Can limit tax liens and back taxes due

Bankruptcy tax assessment methodology

Since the purpose of bankruptcy is to reduce or make debt manageable, taxes due to the IRS are no exception. For this reason, realistically, factually and thoroughly approaching the question of how filing for bankruptcy affects IRS tax debt may involve a number of techniques, and/or methodologies. An example methodology is provided below.

1. Determine type of bankruptcy and if judicial rule will override IRS regulation
2. Identify assets not included in the bankruptcy which taxes may be due against
3. Consult with the IRS bankruptcy division, and bankruptcy lawyer
4. File an ‘offer in compromise’, IRS Form and other required documents

IRS tax forms used in relation to bankruptcy

Extensive documentation is often required for bankruptcy filing as debtors, the bankruptcy court, and the IRS should all be made aware of the financial scenario the party filing for bankruptcy faces in order to determine, and asses payment or non-repayment of debt obligations. In terms of IRS debt, some of the forms and information used during bankruptcy proceedings include those mentioned below:

• IRS Form 656-Offer in compromise
• IRS Form 1040 (and related documents)
• Internal Revenue Bulletin (IRB) 2006-40
• IRS Publication 538: Offer in compromise information
• Information pertaining to reduced tax year filing during bankruptcy
• IRS Publication 908: Bankruptcy tax guide
• Bankruptcy Abuse Prevention And Consumer Protection Act of 2005: BAPCPA ACT: Title VII

Bankruptcy filing tips

Filing for bankruptcy involves bankruptcy law, US Statutory law and dynamic individual financial situations. For this reason not seeking professional assistance is generally not a good idea. There are many legal requirements, options and stipulations that if not abided by, may disqualify, hamper or reduce the potential tax advantages of filing for bankruptcy. Hence, the following tips are not guaranteed to be completely accurate due to the complexity of tax law, and are just a few of the several things to consider when dealing with taxes due to the IRS when filing for bankruptcy.

• File taxes regardless of bankruptcy. Not doing so can complicate or disqualify the bankruptcy.

• For a chapter 7 bankruptcy, File an IRS Form 1040 shortly after the bankruptcy case begins. This can minimize the amount of tax due under Section 1398 of Title 26 of the US Code. IRS Publication 538 has more information on this.

• Utilize all legal bankruptcy related tax deductions, reduction techniques and options to minimize non-qualifying tax debt. For example deduct bankruptcy lawyer fees in Schedule A of bankruptcy tax year.

• Signing over of real estate that had equity value prior to bankruptcy filing to an offshore trust may protect the equity in the property from tax liens if in compliance with U.S. Code statutory law.

• Some taxes from tax years prior to filing for bankruptcy may still be claimed by the IRS

• For unanswered questions or concerns contact the IRS Taxpayer Advocate Service at 1-877-777-4778 and/or speak with a qualified tax professional.

Sources consulted:

1. http://www.moranlaw.net/taxfaq.htm (Moran Law Firm)
2. http://www.irs.gov/pub/irs-pdf/p908.pdf (Internal Revenue Service)
3. http://www.mckenzielaw.com/BANKRUPT.html (Mckenzie law firm)