If you owe back taxes, the general rule is that you pay the state and then negotiate with the IRS. The reason for this is that the states are particularly aggressive when it comes to collecting back taxes. Some states are more aggressive than others. And their practices vary over time.
In the event of a state tax debt and aggressive state tax collection tactics, one might need to file for bankruptcy. This can help buy time to figure out a game plan for satisfying or avoiding the state tax debt and it may result in the debt being discharged. But what if the state continues to collect even after the bankruptcy petition is filed? Is there any remedy?
The recent In re Omine, No. 6:05-cv-1633-Orl-31DAB (M.D. Fla. July 23, 2007) addresses this. It involves the Florida Department of Revenue (“DOR”) which continued to collect back taxes even after the bankruptcy was filed.
Facts & Procedural History
Gregg and Michele Omine filed for Chapter 13 bankruptcy protection in 2001. The Florida DOR filed a claim seeking to recover public assistance money paid to Gregg Omine’s former wife and children in Hawaii.
The debt was included in the Omines’ Chapter 13 plan, but the Florida DOR continued to collect on the debt in violation of the automatic stay, which halts collection efforts during bankruptcy proceedings.
The bankruptcy court found that the Florida DOR had willfully violated the automatic stay and awarded damages and attorney’s fees. The case was appealed multiple times, and the courts ultimately affirmed the bankruptcy court’s decision.
About the Automatic Stay
The automatic stay is a provision of the Bankruptcy Code that goes into effect as soon as a bankruptcy petition is filed. It halts most collection efforts by creditors against the debtor or the debtor’s property.
The automatic stay is intended to give the debtor a breathing spell from creditor collection efforts and to allow the bankruptcy court to oversee the orderly resolution of the debtor’s debts.
The automatic stay applies to all creditors, including government entities, and it can prevent the continuation of lawsuits, wage garnishments, and other collection activities.
Damages for Violation of Automatic Stay
Section 362(h) of the Bankruptcy Code provides for damages to be awarded to a debtor who suffers an injury as a result of a willful violation of the automatic stay. The damages may include actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, punitive damages. The burden of proving entitlement to damages under Section 362(h) falls on the debtor, and the standard of proof is a preponderance of the evidence.
In the present case, the Florida DOR argued that the district court improperly shifted the burden of showing a violation of the automatic stay from the debtor to the creditor. The Florida DOR contends that multiple bankruptcy courts have held that the burden falls on the plaintiff/debtor to show entitlement to damages under Section 362(h) of the Bankruptcy Code.
However, the district court’s earlier order in the prior case concluded that Omine’s income was essential to the debtors’ ability to make plan payments and therefore remained estate property to which the Florida DOR was not entitled. The bankruptcy court similarly concluded that the debtors’ income was considered essential to their ability to make plan payments and remained estate property.
The appeals court agrees with the district court and affirmed the district court’s ultimate holding.
States are often more aggressive than the IRS when it comes to collecting back taxes, but bankruptcy can provide relief and time to come up with a game plan. You may even have to sue the state tax collector. This case illustrates that state tax authorities must adhere to the automatic stay, and those who owe back taxes may be awarded attorney’s fees and costs if they continue to collect. Ultimately, this case serves as a reminder that those struggling with state tax debt should explore all options available, including bankruptcy, to protect their rights and interests.