2022 Increases in Filing and Exemption Limits for Bankruptcy Cases

The Bankruptcy Code is full of specific dollar limitations and allowances. These figures include dollar limits on eligibility for use of Chapter 13 and many other amounts, such as the value of exemptions permitted to bankruptcy debtors under 11 USC §522. All of these dollar amounts are adjusted by the amount of change in the Consumer Price Index for All Urban Consumers in the manner set out in 11 USC §104(a), a part of the bankruptcy code. The adjustment occurs every three years on April 1st and is based on the amount of change that has occurred over the previous three years ending December 31 the year before the adjustment. Dollar amounts are rounded to the nearest $25 and the adjustment applies to other limits set forth in the bankruptcy code.

The Judicial Conference of the United States has given notice of the changes going into effect for cases filed after March 31, 2022. Chapter 13 cases are now permitted for individuals with unsecured debts of no more than $465,275 and secured debts of no more than $1,395,875 in all cases filed April 1, 2022, and later. This is an increase of more than $25,000, about the same amount of increase announced in 2019 for unsecured debt.   Secured debt increased by $138,025 over the Chapter 13 limit previously imposed.

In states where federal exemptions are allowed, such as Oregon, the federal homestead exemption will be increased to $27,900 per person. The federal exemption for a car is now $4,450, probably an inadequate exemption in view of the supply related increases for vehicles occasioned by COVID-19 influenced supply shortages of computer chips.

Under the statute governing many federal bankruptcy dollar limitations, if the amount is indexed with an increase due to inflation, it must go up by at least $25.  While many states have opted out of federal exemptions and limit bankruptcy exemptions to those provided in state statute, many other dollar amounts apply to all cases filed in bankruptcy court.  Federal exemptions were allowed in Oregon as of July 1, 2013. These new dollar figures will only come into play for filings on or after the April 1, 2022 effective date, but they may allow more flexibility in Chapter 13 filings.

Tax Relief in Bankruptcy?

The 9th Circuit Bankruptcy Appellate Panel decided a case recently with important consequences for delinquent taxpayers. On December 17, 2015, the Bankruptcy Appellate Panel handed down a decision in United States v. Martin that may advance a thorny problem toward resolution by the U.S. Supreme Court. The ruling, although of an interim nature, stated that a document filed by the taxpayer, intended as a tax return, should be considered a tax return and thus a dischargeable debt in bankruptcy. Bankruptcy lawyers and their clients with late tax returns should be well pleased.

The facts of the case are fairly common. Kevin and Susan Martin only got around to filing some missing tax returns after the IRS began collection on some involuntary tax assessments. The late-filed tax returns increased the Martins’ tax liability in some years, and decreased it in at least one tax year. After waiting the two years required by 11 U.S.C. §523(a)(1)(B)(ii) before a tax debt from a late-filed return can be discharged, the Martins filed bankruptcy.

A dispute arose when the IRS did not agree that the Martins’ tax debt had been discharged in the bankruptcy proceeding. To resolve the matter, the Martins filed an adversary proceeding in the bankruptcy court against the IRS. They took this action without the benefit of counsel, on a pro se basis. Bankruptcy Judge Richard Lee, sitting in the Eastern District of California, agreed with the Martins and ruled the tax was dischargeable. It was a well-reasoned opinion by the bankruptcy court that harmonizes the statutory language with the legislative intent of Congress. The reasoning carefully balances the “fresh start” of the debtors against the financial interests of the government.

The IRS did not share my enthusiasm for Judge Lee’s determination and appealed to the Bankruptcy Appellate Panel for the 9th Circuit. With the full weight of the federal government and the U.S. Attorney’s office arrayed against them, one would think the Martins would hire counsel to represent them in the Appellate Court. However, their win in the Bankruptcy Court encouraged them to go it on their own. Their briefs are just that, brief, and verify the pro se nature of this case. In fact, the Martins orally argued the case themselves before the Appellate Panel. The Martins won another round and the Bankruptcy Appellate Panel came back with a wonderful 28 page opinion, mostly in their favor. On the most important issue, the dischargeability of tax on late filed returns, this was an important win for bankruptcy debtors with outstanding tax liability.

Three circuits previously reached the opposite conclusion, holding that late-filed tax returns are no longer considered tax returns for bankruptcy discharge purposes. In the first of these decisions, McCoy v. Mississippi State Tax Commission, the 5th Circuit Appellate Court determined a late-filed state tax return to be disqualified from discharge by the 2005 amendment to 11 U.S.C §523(a)—specifically, the language included as part of a hanging paragraph appended to that section stating:

For the purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable non-bankruptcy law (including applicable filing requirements).

The 5th Circuit in McCoy found a timely filing requirement in the Mississippi state law and disqualified the McCoys’ late-filed tax return from discharge using this language.

I have discussed McCoy and two subsequent cases, Fahey and Mallo, from the 1st and 10th Circuits respectively, in another article “Trouble With Tax Debt in Bankruptcy.”  With these three Circuit Court opinions, the trend has not been looking good for delinquent taxpayers. Only the 8th Circuit, with the Colsen case decided based on pre-2005 amendment law, holds that a late return can be discharged if it otherwise meets bankruptcy discharge criteria.

The Martin opinion, containing a comprehensive analysis of just why the McCoy, Fahey, and Mallo decisions are wrong, is only a Bankruptcy Appellate opinion