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Can a Third Party File Bankruptcy for Another?

A third party may be able to file a bankruptcy for someone else. For example, a Power of Attorney may be used to start a bankruptcy action party, but bankruptcy courts have limited the authority of individuals to take this step. The third party in this situation is the agent named by the principal (the would-be debtor in the bankruptcy) in the principal’s Power of Attorney (POA). Since the Bankruptcy Code does not prohibit a third party from taking this action but does require the debtor to be involved in the bankruptcy case, such a filing relies on factual determinations and legal interpretations by the Bankruptcy Court where the case was filed, which is the focus here.

Power of Attorney and State Law

With state law playing a large role in what powers can be granted through a POA and the language that is needed in the document, the courts that have interpreted the filing by a third party via a Powers of Attorney using similar ideas but oft times have reached divergent decisions. Pennsylvania is the primary focus here, but opinions from other states cannot be ignored as they are considered by courts during their decision making.

The principal for whom a Power of Attorney is drafted needs to have the language fit the law that will be applied in the individual’s state. If the agent is supposed to be able to file a bankruptcy for the principal, the Bankruptcy Court looks at the intent from the POA’s wording. At this point, a review of various approaches in different jurisdictions may give a clearer understanding of how the law evolves from jurisdiction to jurisdiction.

Interpretation Left to Bankruptcy Courts

As in Pennsylvania, the courts that have been responsible for determining what a given state’s law requires have been hesitant to prohibit the use of a Power of Attorney regarding bankruptcy in all circumstances. Fairness has been a concern that actually has resulted in positions from state to state that can support a given POA in one state while finding that it is not sufficient in another state. This can make the choice of law to be applied perhaps the most important decision in this area of law – in fact, this is a reason why a Power of Attorney should clearly indicate which state’s laws formed the foundation for the drafting of this legal instrument if it is to be used to file for bankruptcy by a third party.

Various jurisdictions over the years that have addressed the POA issue. There have been influential decisions from bankruptcy courts in Virginia, Missouri, and Pennsylvania. These will be highlighted to show how the issues has been approached by the federal judiciary and to demonstrate how the standards for what constitutes an acceptable document tend to differ, despite some commonalities overall.

Important Decisions from Virginia

A number of the opinions have been authored by judges within the Bankruptcy Court for the Eastern District of Virginia. A 1980 decision looked at when, during a bankruptcy action, an agent might be able to proceed in place of the principal. Specifically, In re Killett revolved around a third party seeking to appear at a reaffirmation and discharge hearing when the debtor, who was an active member of the Armed Services, was in England and was unable to return for this hearing. Section 524(d) of the Bankruptcy Code was at issue.

The Court pointed to its language stating that a debtor shall appear at this hearing. The law views “shall” as is a word that communicates a duty so that the individual has no choice about what must be done. However, despite this, the Bankruptcy Court noted that, as a court of equity, it had to weigh the facts to determine its decision, despite the use of “shall” within the Code’s provision. The Judge concluded that, under the circumstances that existed, the debtor would and could rely on the counsel of his attorney and allowed a third party to appear in the debtor’s place. The Court noted that “any loss of rights is on [the debtor].”

Subsequent cases from Virginia seemed to take a harder line against the use of Powers of Attorney in bankruptcy courts, however. These opinions – like In re Killett – often came from the Bankruptcy Court for Virginia’s Eastern District. 1981’s In re Raymond involved spouses in which only the wife was present at the time of filing. Since the husband had to be out of the area and could not be easily reached, the wife decided to file a bankruptcy on behalf of herself and her husband via a Power of Attorney in which he named her as his agent. The Court refused to permit this to proceed as it emphasized that bankruptcy is the personal exercise of a privilege – not a right – that has serious implications. The Court stated that, too often, a third party will abuse the POA in general and would not permit this to occur in bankruptcy actions.

Then, there was a 1990 case (In re Smith) from the same Bankruptcy Court, with another spouse seeking to file a joint bankruptcy case but, again, having to rely on a Power of Attorney to do so because the husband was physically disabled and could not execute the necessary documents. Again, the Court would not allow this filing. It also pointed to some considerations regarding third party filings, such as the lack of language in the document that set forth a specific power that authorized such a bankruptcy filing.

Notably, the Court would not point to the absence of this language for its denial and wrote that a guardian or a “next friend” could possibly file such a bankruptcy if a court with the necessary power issued an Order regarding this appointment and also included sufficient authorization to the third party filing. A “next friend” is someone who applies to a court based on an individual’s medical incapacity or minority.

The next friend would have to be in possession of evidence (usually an opinion letter) from a licensed, qualified physician to show medical incapacity. Then, the Bankruptcy Court would require the next friend to have the all of the information needed to file a bankruptcy; after this party filed the petition, schedules, and related forms, the Court would proceed with the naming of a guardian (who could be the next friend) to handle the remainder of the case. These decisions did not appear to view a Power of Attorney as sufficient by itself to justify a third party filing.

Other State Courts Also Have Looked at POAs

Courts continued to struggle with the issue of a Power of Attorney being sufficient to allow third party filings. For example, In re Harrison, a 1993 bankruptcy case from Florida, stated that a Power of Attorney could provide authority for a bankruptcy filing in unusual circumstances, such as someone in the service during an active conflict, or in a hospital, or in a state of incapacitation. The court went on to note that a non-debtor cannot be granted authority to sign a verification under oath unless this person has personal knowledge of the facts involved. This is due to Rule 9011 of the Federal Rules of Bankruptcy Procedure, known as the “certification rule.” The Court scheduled a hearing about the possibility of sanctioning the third party for signing the statement that verified facts known only by the debtor.

Courts throughout the United States have continued to struggle with the effect of the Power of Attorney in the context of a bankruptcy filing. Before getting to Pennsylvania, a few other decisions show how what begins as a similar perspective can lead to further confusion among the federal bankruptcy courts. Vermont was the source for an opinion from 2001 that bears similarity to the reasoning found in some leading Pennsylvania cases. The Bankruptcy Court in In re Curtis decided that an agent can file for relief for a debtor under 11 U.S.C. Section 109 but required something more than a simple general Power of Attorney.

In this case, the debtor actually came forward to oppose the agent’s action after the latter filed the petition. The Court’s decision was that the agent lacked authority from the time of the original filing because the Power of Attorney did not include specific language that permitted the bankruptcy filing or allowed the agent even to pursue any litigation or legal proceeding while it had language involving business transactions, gift giving, and other matters. The authority on which the third party relied was seen as too general, resulting in the case’s dismissal. Courts commonly discuss the requirement of “specific language” in such cases, but the problem is practice is that different courts have different ideas about what words are specific enough to be necessary words.

Then, In re Eicholz, a decision from the Western District of Washington state in 2004, opined that, under Rule 9001(c) of the Federal Rules of Bankruptcy Procedure, an agent can file for bankruptcy on behalf of the principal under appropriate circumstances. The language within the Power of Attorney again was crucial to whether or not a bankruptcy filing was within the POA’s scope. Here, the language had to expressly grant authority to start a bankruptcy action. Otherwise, the principal had to ratify the third party’s actions, which looked at the passage of time as well as the acceptance of a benefit from agent’s act or the assumption of an obligation imposed by this act.

One last opinion before reviewing how Pennsylvania is consistent with the overarching idea about the need for specific language comes from the middle of the country. In re Sapp from the Northern Division of Missouri’s Eastern District in 2011 looked at a joint bankruptcy in which the wife was found to be mentally incapacitated and physically disabled (which was defined to mean that she would be prevented from participating in the case in person, by phone, via the internet, or in any other manner). While the case actually involved a guardianship, the Court still stated in this decision a Power of Attorney could not justify a third party filing a bankruptcy action unless the POA specifically set out the agent’s power to file for bankruptcy for the principal. Again, the exact language that would meet this standard did not appear.

Pennsylvania: Third-Party Filings and Powers of Attorney

As noted previously, Pennsylvania decisions are basically consistent with the reasoning found in other jurisdictions. The Bankruptcy Court for the Eastern District of Pennsylvania has two decisions that date back to the 1980s but remain important even now. 1987’s In re Zawisza dealt with a Chapter 13 action filed by a “next friend” and determined that a next friend or guardian ad litem could pursue a bankruptcy under appropriate circumstances.

However, In re Sullivan from 1983 focused on the use of a POA, making it more relevant here. The situation involved a monk who was a Pennsylvania domiciliary but would be in Holland for approximately five years. Meanwhile, he faced financial difficulties in Pennsylvania, which led him to give his brother a Power of Attorney that contained a specific right to sell his real property. Unfortunately for the monk, the language was limited to this action and did not mention bankruptcy. Despite this, the brother – as the monk’s agent – filed a Chapter 7 bankruptcy on behalf of the monk to prevent further deterioration of his financial position. In response, the Bankruptcy Court dismissed this filing because the limited POA that existed did not provide legal authorization for a third party filing. From Holland, the monk amended his Power of Attorney to include a specific grant for his agent to pursue personal bankruptcy on his behalf.

The brother now was authorized to do whatever the unavailable principal could do if he were personally present. Furthermore, in addition to filing the bankruptcy that originally was to be dismissed, the agent also could attend the §341 Meeting of the Creditors in his brother’s place, despite the mandate in the Bankruptcy Code that the debtor must attend this meeting. Being that the Bankruptcy Court is a court of equity, the decision from the Eastern District of Pennsylvania permitted the monk’s agent to attend the meeting while the monk was deemed unavailable due to his five-year commitment in Holland.

Thoughts about the Power of Attorney & Bankruptcy in PA

This case probably sets forth the best blueprint for an agent’s use of a Power of Attorney to file a bankruptcy in Pennsylvania. The POA needs to have specific language that authorizes the agent to file an action under the Bankruptcy Code. The principal also must be unavailable. The cited case involves a debtor who is unable to be physically present to pursue relief under the Code.

Although no definitive statement can be made with absolute certainty, the bankruptcy courts in Pennsylvania are likely to seriously consider and, quite possibly, permit a third party to pursue a bankruptcy for the principal using a Power of Attorney containing language specifically authorizing such a filing under very specific circumstances. These would include debtors who can be proven to be mentally incapacitated or physically unavailable (either due to a significant physical disability or due to inaccessibility). The reasoning behind this is that this facts would prevent meaningful (if any) participation by the debtor and also would amount to a denial of due process if a third party with authority (e.g., through a valid POA) would be prohibited from pursing this matter.

Income Tax: Priority Debt in Bankruptcy?

The general rule for income taxes owed to federal, state, and local governments is that they will not be discharged in a Chapter 7 bankruptcy – you will owe them after your bankruptcy ends because they often are classified as priority debts. However, as with all generalizations, there are exceptions. We will look at both the general rule regarding priority debts as well as some exceptions. Also, the way that these taxes are handled in Chapter 13 bankruptcies will be mentioned briefly.

The first point to remember is that we aren’t looking at taxes for which a lien exists. For example, if the IRS files a federal tax lien against you for income taxes that you did not pay, there are no exceptions because this makes the tax debt into a secured debt that must be paid.

When there is no lien, any income taxes that you owe are unsecured debts. While the general rule with unsecured debts is that they are dischargeable in Chapter 7 bankruptcies, general rules – while not made to be broken – do bend at times under our laws. There are a number of unsecured debts that have been classified as priority unsecured debts. These must be paid prior to other claims, which is why they are termed “priority debts.” Although the nondischargeability makes them look like secured debts, this category of debts has no collateral protecting the creditor. However, their payment is considered more important than most unsecured debts, which is why this category exists.

Income tax debts – when not secured by liens – belong to this select group of unsecured debts given priority in bankruptcy. I had mentioned that income taxes generally are not discharged but need to explain when they are given priority. First, taxes on income for a year that ends no later than the date that you file your bankruptcy petition “for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition” are given priority. When these words from the Bankruptcy Code read very carefully, they basically mean that, if you fail to file a tax return that was due within three years before you filed for bankruptcy, you face a priority debt for any taxes that you owe for that tax return.

A second factor also can create a priority debt. The tax liability must have been assessed by the government within 240 days of your bankruptcy filing. When an “assessment” is made is defined by federal and state laws, but this date is when the amount of taxes that you owe has been determined by the government. In addition, if an offer in compromise existed or was pending during the 240 days, then the length of time that the offer existed is added to this period, along with an additional 30 days. In addition, there also are times when a bankruptcy previously filed during this time frame can extend the period for filing a new bankruptcy beyond the 240 days.

A third way that income tax debts can become priority unsecured claims is when you don’t file a tax return when it was due, which usually is April 15th of the following year for individuals. If the tax return was not filed, you cannot get the tax debt discharged in a Chapter 7 bankruptcy. You also can’t get the debt discharged if you failed to file the return when it was due and only filed it fewer than two years before filing for bankruptcy. In addition, if you filed a false return or simply attempted to evade paying your taxes, then you have created a priority debt. Income taxes that are assessable after a bankruptcy is filed will remain after the bankruptcy ends, as well.

As for interest and penalties on any income tax debts, you should expect these to be nondischargeable, too. On occasion, a tax penalty might be discharged if it is found to be punitive, which basically means that the penalty is so excessive to be a punishment instead of reflecting the cost of investigating and the loss based on what you did (or didn’t do), for example.

Although this is a somewhat simplified version regarding how income tax debt becomes a priority debt, some exceptions that will allow these debts to be discharged need to be noted. An income tax debt that is more than three years old with a return filed when it was due can be discharged. Another exception is when a return was filed late but was filed more than two years before the bankruptcy was filed – this debt may be dischargeable. In addition, any assessment of your tax liability by any of the taxing authorities (federal, state, or local) that occurred more than 240 days before you filed for bankruptcy can lead to a discharge of the tax debt. As mentioned earlier, older income tax debts are much less likely to be classified as priority debts.

Income tax debt also has implications in Chapter 13 bankruptcies. To summarize Chapter 13’s treatment of income tax debts, a lien again creates a secured debt, and this must be paid. Without the lien, an income tax debt can become a priority debt when it falls within the criteria outlined for a Chapter 7 filing. Although interest could be dischargeable, it is likely to remain when the tax debt has priority status. Likewise, penalties on these debts are nondischargeable to the same extent as they would be with Chapter 7. Therefore, your Chapter 13 plan would have to account for making payment of these debts.

Finally, it should be remembered that, when only one spouse owes the tax debt, a married couple’s property owned by the entireties is protected in a bankruptcy. In addition, this applies to the property of a spouse who does not owe taxes and is not part of the bankruptcy filing. And there is a last word of caution that anyone with income tax debts needs to remember: you can’t get around the priority nature of income tax debts by paying them with credit cards or other types of debt instruments – your new debt will be nondischargeable, even though your tax debt is gone.

As this brief look at priority debts that involve income taxes owed to federal, state, or municipal governments illustrates, this can be a difficult area of the law to navigate successfully. Of course, the same can be said of bankruptcy in general. This is why, if you are thinking of filing for bankruptcy, you also should think of discussing the possibility with someone who has experience helping individuals through this process. You do not want to get yourself into a situation that might do you more harm than good in the end.