Archive for the ‘ Crime ’ Category

Payday Lenders

Here is a very amusing and outraged report on “payday lenders” from John Oliver, the British reporter who apprenticed with Jon Stewart and Steven Colbert.

He’s accurate in presenting the problem: desperate and unthinking people can get money easily, but they will pay astronomical interest and the lenders are unscrupulous when it’s time to collect.

Few of my clients have “payday loans” to discharge, but one in particular stands out because the creditor threatened to arrest her. Actually, the creditor still threatens arrest today, but also gives no return address so I can’t serve it with papers to get an injunction and an award of attorney’s fees.

John Oliver bemoans the lack of regulation against these predators. I don’t see that better regulation will do much; industries almost always “capture” the governments trying to regulate them. Any industry has more capital and focused energy than the members of the general public who are exploited by the industry. Lawmakers will always listen respectfully to the industry’s side of the story, no matter how unconscionable their actions, because the industry can show results at election time.

On an issue like this, I become somewhat libertarian. The best defense against these predators is education, not regulation.

When a Tax Court case opens with “petitioner is a fugitive from justice, living abroad, perhaps in Khartoum, Sudan,” I wonder whether the taxpayer can win against the government. When I further read about a state sales-tax audit leading to a law enforcement sting netting nine people in custody, but that the “petitioner avoided arrest [and] . . . is subject to outstanding arrest warrants for numerous criminal offenses, including theft of sales tax, the filing of false and fraudulent State tax returns, racketeering, and money laundering,” I’ll bet that the IRS wins this case, no matter what. But sometimes the underdog prevails.

Here, it’s Abdalla Mohamed, the owner of several beauty-supply corporations, a fellow who apparently bilked tax authorities out of hundreds of thousands of dollars, laundered money, and fled the country.
First, the IRS did an audit and found underreporting of more than $300,000 in tax (or almost $1 million in income) for 2006 and 2007. Mr. Mohamed was not present for the audit. His attorney agreed to the deficiencies in income tax, but not to the fraud penalties that the IRS tried to assess. So the Tax Court only needed to decide whether to impose the fraud penalty or not.

For 2006, the IRS laid out the paper trail showing that the corporations made far more money than Mr. Mohamed allowed to be shown on his tax returns, and the fraud penalty applied. For the 2007 tax year, a small fact complicated things: Mr. Mohamed had his tax preparer sign and file the return on his behalf, rather than signing it himself.

As a result, Judge Halpern declared that Mr. Mohamed’s 2007 return was not valid. If there is no valid return, there is no understatement of tax, because there is no original statement of tax. For the fraud penalty of IRC § 6663 to attach, there must be an understatement of tax. So no fraud penalty for 2007.
But the IRS wouldn’t just give in easily. It next argued that Mr. Mohamed’s 2007 return got filed late – indeed, no tax return was filed at all – so the taxpayer owes a delinquency penalty under IRC § 6651, and since the taxpayer clearly intended to defraud the government with the attempted return, he owes the 75 percent penalty for fraudulent-failure-to-file, IRC § 6651(f).

At trial, Judge Halpern didn’t like this argument. He pointed out that, for the section 6651(f) 75 percent penalty to apply, the failure to file the return had to be fraudulent. Here, the taxpayer fully intended to file a return on time, and took the steps that he thought would achieve that result (letting his tax preparer sign the return), only to be denied the filing at the last moment – or even after the last moment, since it was Judge Halpern who decided it was not a valid return. In fact, Judge Halpern found that Mr. Mohamed’s delinquency was perfectly reasonable (the taxpayer often used his accountant to perform his tasks), and qualified him for the “good cause” exception to the delinquency penalty.

So for the 2007 tax year, Mr. Mohamed had no penalty at all!
Of course, Mr. Mohamed’s victory is relatively small. He still owes close to a million dollars in taxes and penalties.

I find it remarkable that he even bothered to fight this fight. He probably has no assets left in this country and cannot return; why pay an attorney to change his total bill to the IRS from $1 million to $800,000? And yet, the decision helps other taxpayers because it clarifies the elements of tax fraud and the delinquency penalty.
If you have issues with tax fraud or the delinquency penalty, particularly if the IRS is on you like a hungry pit bull on a steak, I am very interested in helping you out.

You file bankruptcy to get rid of debts you can’t afford to pay and to get the fresh financial start in life that you so desperately need. But remember … not all debts can be wiped out in your bankruptcy.

The Bankruptcy Code lists several types of debts that can’t be discharged in bankruptcy. These are things like:
•    Child support payments
•    Spousal support
•    Most student loans
•    Certain tax debts
•    Injuries caused by driving under the influence
•    Debts which are the subject of a divorce judgment

•    Civil penalties from government entities

Traffic tickets and parking tickets fall under the last category, “civil penalties.”

Chapter 7 Bankruptcy

523(a)(7) forbids the discharge of civil penalties or criminal fines. Therefore, in a Chapter 7 bankruptcy government fines aren’t wiped out.

Chapter 13 Bankruptcy

Ahhh … Good News! (Maybe).

Bankruptcy Code 1328(a)(3) allow a Chapter 13 debtor to discharge non-criminal government fines if he completes all the court approved plan payments.

What is included in these “civil penalties” or “civil infractions”? This can be minor offenses such as speeding, failing to stop at a stop sign, or parking tickets. These claims are places with the rest of the unsecured creditors in a Chapter 13 plan. They are paid over the next 3 to 5 years from what is affordable to the debtor. Whatever isn’t paid through the 3 to 5 years plan is discharged at the end.

One more practical pointer … Even if you have a criminal fine that isn’t wiped out by bankruptcy, you can include it in a Chapter 13 plan. This stops the creditor (which is usually the government) from collecting from you during the course of the Chapter 13 bankruptcy. And that means the State Government is stopped from taking your drivers license or sending you to jail for non-payment of this fine. Yes, at the completion of the 3 to 5 year Chapter 13 plan the balance due remains due and the State Government can then collect from you. But you are safe during the time the chapter 13 bankruptcy is in effect.

So …
•    If the fine is for a criminal action, it’s not wiped out in either a Chapter 7 or a Chapter 13 bankruptcy.
•    But if your fine is a civil penalty it’s not wiped out in a Chapter 7 bankruptcy, but it can be discharged in a Chapter 13 bankruptcy.
•    And even if can’t be discharged in either a Chapter 7 or a Chapter13 bankruptcy, you can get protection from revocation of drivers license or being sent to jail for non-payment while the Chapter 13 proceeds.

Credit: Stephen Brittain of Victorville

Living in semi-arid California, I’ve gotten used to seeing large columns of smoke on hot, windy days.  Most recently, I could see the Springs Fire burning between Camarillo and Malibu from a distance; happily, it did little damage to structures, and no one died from it.  This one was not caused by arson, but it sparked my curiosity: if authorities determined that someone was responsible for the fire, and fined him, could he discharge that fine in bankruptcy?

I am honestly a little surprised at the lack of hot air that has been expended on this topic elsewhere.  At the risk of fanning controversy, I think that a careless arsonist would probably be able to discharge his debt relating to a wildfire.

Dischargeability of debt depends on its nature.  The bankruptcy code assumes that debts are dischargeable; a nondischargeable debt is the exception, not the rule.

We saw the extreme in punishment for an act of wildfire arson in January this year: a state judge sentenced a methamphetamine addict to death for setting the Old Fire in San Bernardino County back in 2003.  That debt won’t be discharged by a bankruptcy; it will only be extinguished at the same time as the criminal’s life.

California does have provisions for fining arsonists: Cal. Penal Codes 452 and 456 prescribe a fine of up to $50,000 for arson, “unless a greater amount is provided by law.”  Where the arson is done for pecuniary gain, the court may impose a fine of up to twice the amount of the gain expected.  This would handle cases like the guy who made $80,000 renting equipment to the Forest Service to put out the fire he had paid $2,000 to have set ((I’m betting that he wasn’t able to report the $2,000 as a business expense on his Schedule C, either).

These fines are not dischargeable in bankruptcy: you can’t discharge a debt for a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit” that is not compensation for actual pecuniary loss.  11 U.S.C. § 523(a)(7).

But the big bucks in fire bills come from judgments for fire suppression.  Cal. Health and Safety Code 13009 provides for payment of the full amount of fire suppression by anyone who sets a fire, negligently or otherwise, or doesn’t clean up a fire hazard in a reasonable time.  Huffington Post reports that the Springs Fire cost $10 million to fight.  The state was awarded $7.6 million from a construction company in fire suppression costs for a 2002 fire in the Angeles National Forest.

These judgments are dischargeable in bankruptcy: the Health and Safety Code section says that they are to be treated as a contractual liability.  They are for pecuniary losses, therefore not subject to the “governmental fines” exception to discharge.

Who knew?  And now we do.

Lenny Dykstra sentenced for bankruptcy fraud

He had a great mansion in Lake Sherwood, near Thousand Oaks, but when his financial-services firm fell apart, so did his life.  Lenny Dykstra thought he could pocket the money from selling his memorabilia, but the bankruptcy court thought differently.

Lesson here: it makes no sense to try to hide any assets from the bankruptcy court.  As a debtor, you are seeking a legal determination that you don’t owe the debt; in return, you are supposed to turn your pockets inside out and let the court tell you what you can keep.  What Dykstra did would have allowed him to get the benefit of bankruptcy without the burden of turning in all his assets; it ain’t fair to his creditors, and it ain’t fair to honest debtors who would have to face their creditors’ suspicions that they might be getting away like Dykstra tried to.