Bankruptcy and the First-Time Homebuyer Tax Credit: What You Should Know
If you are planning to file for consumer bankruptcy and you received a first-time homebuyer credit in the past, you might be wondering if this credit will be eligible for discharge in your Chapter 7 bankruptcy case or whether you will still owe this credit once you have received your bankruptcy discharge. A recent bankruptcy case suggests that the first-time homebuyer credit is a “tax” and not a “debt” in a Chapter 7 bankruptcy case, and thus it is not dischargeable if a debt files for Chapter 7 bankruptcy. The case is likely to have implications for future personal Chapter 7 bankruptcy cases involving the first-time homebuyer credit, and it will be critical to seek advice from a bankruptcy attorney about your situation.
Understanding the First-Time Homebuyer Tax Credit
In the Housing and Economic Recovery Act of 2008, a tax credit was available for first-time homebuyers who purchased a house between 2008 and 2010, according to an article in Forbes. In most cases, the tax credit was for $7,500, but in some cases it was an $8,000 tax credit. Yet this tax credit was different from certain other tax credits—this tax credit had to be repaid, or “recaptured.” For first-time homebuyers who took advantage of the tax credit, they would need to repay it over the following 15 years under IRC § 36(f).
In the 15 years following the first-time homebuyer tax credit, the repayment or recapture would occur by increasing the taxpayer’s amount of tax each year. The subsection states that, when a taxpayer uses the credit, “the tax imposed by this chapter shall be increased by 6.6% of the amount of such credit for each taxable year in the recapture period.”
Is the First-Time Homebuyer Credit a Debt or a Tax?
While the classification of the first-time homebuyer credit as a debt or a tax might not make much difference to consumers who are not filing for bankruptcy—either way, they will be responsible for repaying the debt—the classification can be hugely significant for a debtor who files for consumer bankruptcy. The U.S. Bankruptcy Code makes clear that many types of taxes cannot be discharged in a bankruptcy case.
Prior to the recent bankruptcy court case, two other courts had considered whether the first-time homebuyer credit should be treated as a debt or a tax. One of those courts described the tax credit as being “like a loan” but ultimately determined that “the obligation to repay is imposed as an increased tax rather than a general obligation.” Another court determined that the credit was a “pre-petition debt that did not fit within any exception” and discharged it.
In the most recent case, In re Shin (2021), the bankruptcy court looked at language from the U.S. Supreme Court to conclude that a repayment obligation for a tax credit is a tax and not a debt, and thus cannot be discharged in bankruptcy. The court’s conclusion is likely to impact subsequent bankruptcy cases involving first-time homebuyer tax credits.
Contact Our Oak Park Bankruptcy Attorneys for Assistance
If you have questions about filing for consumer bankruptcy or about whether certain debts are dischargeable, our experienced Oak Park bankruptcy lawyers are here to help. Contact the Emerson Law Firm today to learn more about how we can assist you.
See Related Blog Posts:
Asset Protection in Your Bankruptcy Case
Do You Know the Difference Between Bankruptcy Facts and Fictions?
Understanding the First-Time Homebuyer Tax Credit
In the Housing and Economic Recovery Act of 2008, a tax credit was available for first-time homebuyers who purchased a house between 2008 and 2010, according to an article in Forbes. In most cases, the tax credit was for $7,500, but in some cases it was an $8,000 tax credit. Yet this tax credit was different from certain other tax credits—this tax credit had to be repaid, or “recaptured.” For first-time homebuyers who took advantage of the tax credit, they would need to repay it over the following 15 years under IRC § 36(f).
In the 15 years following the first-time homebuyer tax credit, the repayment or recapture would occur by increasing the taxpayer’s amount of tax each year. The subsection states that, when a taxpayer uses the credit, “the tax imposed by this chapter shall be increased by 6.6% of the amount of such credit for each taxable year in the recapture period.”
Is the First-Time Homebuyer Credit a Debt or a Tax?
While the classification of the first-time homebuyer credit as a debt or a tax might not make much difference to consumers who are not filing for bankruptcy—either way, they will be responsible for repaying the debt—the classification can be hugely significant for a debtor who files for consumer bankruptcy. The U.S. Bankruptcy Code makes clear that many types of taxes cannot be discharged in a bankruptcy case.
Prior to the recent bankruptcy court case, two other courts had considered whether the first-time homebuyer credit should be treated as a debt or a tax. One of those courts described the tax credit as being “like a loan” but ultimately determined that “the obligation to repay is imposed as an increased tax rather than a general obligation.” Another court determined that the credit was a “pre-petition debt that did not fit within any exception” and discharged it.
In the most recent case, In re Shin (2021), the bankruptcy court looked at language from the U.S. Supreme Court to conclude that a repayment obligation for a tax credit is a tax and not a debt, and thus cannot be discharged in bankruptcy. The court’s conclusion is likely to impact subsequent bankruptcy cases involving first-time homebuyer tax credits.
Contact Our Oak Park Bankruptcy Attorneys for Assistance
If you have questions about filing for consumer bankruptcy or about whether certain debts are dischargeable, our experienced Oak Park bankruptcy lawyers are here to help. Contact the Emerson Law Firm today to learn more about how we can assist you.
See Related Blog Posts:
Asset Protection in Your Bankruptcy Case
Do You Know the Difference Between Bankruptcy Facts and Fictions?
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