Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘income tax lien’ tag

Paying Income Taxes through Chapter 13

December 23rd, 2019 at 8:00 am

Chapter 13’s advantages in paying off your priority income taxes become clearer when you see what you don’t have to pay.

 

Last week we got into the advantages of paying priority income taxes through a Chapter 13 “adjustment of debts” case. Those are the usually-recent income taxes which cannot be written off (“discharged”) in bankruptcy. Today we show more clearly how Chapter 13 can be tremendously helpful with income taxes.

The Example: The Tax Breakdown

This example expands on one we introduced last week. Assume that you owe $10,000 to the IRS for income taxes from the 2016 tax year.

In addition there’s a failure-to-file penalty of $2,000 for filing 4 months late without getting an extension. The IRS assesses that penalty  at 5% per month of being late. So here, 4 months at $500 per month = $2,000.

Plus there’s a failure-to-pay penalty of $1,650. That’s calculated at 0.05% each calendar month or partial month that the tax remains unpaid. So here, 33 months or partial months from the April 2017 payment due date to December 2019, at $50 per month = $1,650. (Note that this penalty is reduced to 0.025% per month if you’re in an IRS payment plan.)

You also owe interest on the unpaid tax. It’s more complicated to calculate because the rate changes. It’s been at 5% per year since April 1, 2018 and 4% for two years before that. Plus it compounds daily. To keep it simple, assume for this example that $1,200 of interest has accrued on the $10,000 tax owed.

So combining these, assume you owe $10,000 in 2016 income tax, plus $3,650 in penalties ($2,000 + $1,650), plus $1,200 in interest, a total of $14,850 owed to the IRS for this tax year.

The Tax and Interest vs. the Penalties

1. Accrued interest. If an income tax does not qualify for discharge (under the rules discussed last week), neither does the interest. So during a Chapter 13 case you’d have to pay the tax and the interest (accrued up to the date of bankruptcy) in full. In our example that’s the $10,000 in straight tax plus the $1,650 of interest, or $11,650.

2. Accrued penalties. But the accrued penalties are quite different. These are usually not treated as priority debt but rather as general unsecured debt. (This assumes there’s no recorded tax lien on the tax, which could make the debt partly or fully secured.) In a Chapter 13 case you pay general unsecured debt only to the extent you can afford to do so. This is AFTER paying all priority and appropriate secured debts. Often you don’t have to pay general unsecured debts, including tax penalties, much. It’s not uncommon that you pay nothing.

In our example the $3,650 in penalties is general unsecured debt. So during the course of your 3-to-5-year case you pay this portion only as much as you can afford. You may pay nothing.

3. Ongoing interest and penalties. Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. The IRS continues to track it. But as long as you finish the case successfully you will not have to pay any of it. This lack of ongoing interest for 3 to 5 years saves you a lot of money. It also often enables you to end your case more quickly.

Filing the Chapter 13 Case

Now assume you filed a bankruptcy case on December 10, 2019. You were in a hurry to file because the IRS was threatening to garnish your paycheck. The 2016 income tax is not discharged in bankruptcy because it’s  less than 3 years from the tax return filing deadline of April 15, 2017 and the December 10, 2019 filing date.

If you filed a Chapter 7 “straight bankruptcy” that would have provided only limited help. It would have stopped the IRS’s garnishment threat for 3 or 4 months while the Chapter 7 case was active. Then if discharging your other debts would free up enough cash flow so that you could reliably get on an installment payment plan with the IRS to pay off the $14,850 reasonably quickly, then Chapter 7 might make sense.

But that’s a big “if” which doesn’t happen often in the real world.  And even if this scenario were possible, you’d likely pay much more than under Chapter 13. After a Chapter 7 case, you’d have to pay the $3,650 in accrued penalties in full (instead of only in part or not at all under Chapter 13). Interest, and the failure-to-pay penalty, would continue accruing non-stop, until paid off. This adds to the amount you eventually have to pay. Each time you’d make a payment, part would go to that month’s new interest and penalties. So you have to keep paying longer.

Chapter 13 Instead

We’ve explained why his situation should play out much better under Chapter 13. But we’ll show how it actually works over the course of a payment plan in our blog post next week.

 

Avoid Income Tax Liens with Chapter 13

September 16th, 2019 at 7:00 am

Chapter 13 can prevent income tax liens on dischargeable taxes. But the discharge takes years, and you may have to pay part of that tax.  

 

Two weeks ago we showed how the filing of a bankruptcy case stops the recording of an income tax lien.  A bankruptcy filing imposes the “automatic stay.” That law makes it illegal for the IRS or state tax agency to record a tax lien. (See Section 362(a)(4) and (5) of the U.S. Bankruptcy Code forbidding the creating or enforcing of a lien.) That’s true whether your lawyer files a “straight bankruptcy” Chapter 7 case or an “adjustment of debts” Chapter 13 one.

Then last week we showed how this works specifically in a Chapter 7 case. IF the tax meets all of the conditions for discharge (legal write-off), then your Chapter 7 filing would prevent a tax lien, discharge the tax debt, and forever avoid a tax lien on that tax.

But how about in a Chapter 13 case? We know it would also stop an income tax lien recording, but then what would happen? Which would be better, Chapter 7 or 13?

Dischargeable Tax Debts under Chapter 13 

Assume again that the tax debt at issue meets the conditions for discharge. That tax would get discharged at the end of a Chapter 13 case, like in a Chapter 7 case. But there are two big differences.

Discharge of the Tax Debt Takes Much, Much Longer

First, that discharge of the tax debt would not happened within about 4 months as it would in most Chapter 7 cases. Instead it would happen usually 3 to 5 years later, the length of most Chapter 13 cases.  The automatic stay protection usually lasts throughout that time. So the IRS/state could take no tax collection actions in the meantime, including the recording of a tax lien.

But such a long period of time may allow problems to arise preventing the completion of your case. If you don’t successfully complete a Chapter 13 case the discharge doesn’t go into effect. So there is more risk that an otherwise dischargeable tax debt ends up not discharged. If the tax doesn’t get discharged, the IRS/state could record a tax lien as soon as you were no longer in your Chapter 13 case.

You May Have to Pay on that Tax

Second, under Chapter 13 you could pay part of the dischargeable income tax debt during your case. You generally pay some of your debts through a monthly payment plan. This may include some of your dischargeable tax debt. In a Chapter 7 case, in contrast, usually you pay nothing on a dischargeable tax debt.

Whether you would pay anything on such a tax under Chapter 13, and how much, depends on many factors. These factors focus on the nature and amount of your other debts, and on your income and living expenses. Often, you actually don’t pay anything more in a Chapter 13 case if you have a dischargeable tax debt than if you don’t owe that tax. That’s because you often pay a set amount towards all your debts based on what you can afford. Whatever you may pay towards a dischargeable tax would otherwise have just gone towards your other debts. However, in general under Chapter 13 there’s some risk that you’d pay something on a tax debt instead of nothing.  

The Bottom Line

It is worth emphasizing that if you successfully complete your Chapter 13 case, a dischargeable tax will get discharged. So you would no longer owe anything on it. So the IRS/state would not be able to record a tax lien on it, just like under Chapter 7.

How about a Tax that Can’t Be Discharged?

What if the income tax at issue does not meet the conditions for discharge? A Chapter 7 or 13 filing would stop the recording of a tax lien, at least temporarily. But what happens then? Is Chapter 7 or 13 better in this situation for permanently stopping a tax lien? We’ll cover this next week.

 

Avoid Income Tax Liens with Chapter 7

September 9th, 2019 at 7:00 am

Chapter 7 can prevent future income tax lien recordings against your home, if the tax is truly dischargeable and you have a no-asset case. 


Last week’s blog post was about filing bankruptcy to prevent the IRS/state from recording income tax liens on your home. The “automatic stay”—bankruptcy’s broad freeze of creditor collection actions—stops tax lien recordings immediately when you file your case. To repeat what we said last week:

Federal law is crystal clear that filing bankruptcy stops and prevents “any act to create, perfect, or enforce any lien” against your property. Section 362(a)(4 and 5) of the U.S. Bankruptcy Code. The IRS and the state tax agencies do not dispute this. They cannot record a tax lien against your home or anything you own once you file bankruptcy.

But how this works is quite different under Chapter 7 “straight bankruptcy” and under Chapter 13 “adjustment of debts.” Today we talk about filing Chapter 7 to stop tax liens, next week about Chapter 13.

The Chapter 7 Advantages

The primary benefit of Chapter 7 is speed. Assume you have a tax debt that meets the qualifications for discharge (legal write-off). (See our earlier blog post titled Bankruptcy Writes Off (Some) Income Taxes.)  Most Chapter 7 cases take 3-4 months from filing to completion. Most Chapter 13 cases take 3-5 years. If you have a tax debt that you are able to discharge, doing so quickly makes lots of sense. Chapter 7 is your likely answer.

Another big benefit: Chapter 7 is much more likely to discharge the tax debt without you having to pay any of it. Most Chapter 7 cases are “no asset” ones. This means that all of your assets are “exempt”—protected from liquidation by the Chapter 7 trustee. This usually means that your “general unsecured” debts would get discharged and be paid nothing. A dischargeable income tax debt is a general unsecured debt. So Chapter 7 would usually discharge the tax debt in full, without paying anything on it. (This assumes that you filed the Chapter 7 case before the IRS/state recorded a tax lien. That recording would turn the tax debt into a secured one, which you very much want to avoid.)

Under Chapter 13, in contrast, there is a significant risk that you would have to pay something on a dischargeable tax debt.  We’ll explain how this works in the next blog post. Avoiding that risk, and discharging the tax in just a few months: these both make Chapter 7 a very tempting option.

The Chapter 7 Disadvantage

The potential downside of Chapter 7 is that the automatic stay protection only lasts a short time. You are protected from the IRS’/state’s power to record a tax lien only during the length of the Chapter 7 case. Section 362(c)(2)(A) of the Bankruptcy Code says that the automatic stay ends when the case is closed. Again, that case closure usually happens only 3 or 4 months after your bankruptcy lawyer files your case.

However, IF the tax debt at issue definitely meets all the qualifying factors for discharge, this is NOT a problem. Once bankruptcy discharges any debt, the creditor may no longer take any collection action on it. Section 524(a)(2) of the Bankruptcy Code make any “act… to collect” a discharged debt illegal. This applies to the IRS and state tax agencies just like any other creditor. So, as long as the tax debt at issue will truly be discharged in your Chapter 7 case, you don’t need to worry about any future tax lien on that discharged debt. Clearly, it’s crucial that you have a competent and conscientious bankruptcy lawyer to determine whether your tax is truly dischargeable. If so, then you can rely on Chapter 7 to prevent the recording of a tax lien, discharge that tax debt, and give you freedom forever from a tax lien on that tax.

 

Prevent Future Income Tax Liens

September 2nd, 2019 at 7:00 am

Bankruptcy can prevent future income tax lien recordings against your home. The result: paying nothing on the tax vs. paying it in full. 


Income Tax Liens Are Dangerous

Our last two blog posts were about judgment liens. First was about how filing bankruptcy can sometimes remove, or “avoid,” a judgment lien from your home. Second was about preventing a judgment lien from hitting your home’s title in the first place.

Income tax liens have some similarities to judgment liens and some differences. An important difference is that there is no mechanism for removing a tax lien once it hits your home’s title. This is especially bad and impactful if the income tax debt at issue was one that bankruptcy could otherwise have written off (“discharged”) for you. The recording of the tax lien turns a debt that you could have written off and paid nothing on into a debt you usually have to pay in full.

So, as with judgment liens, it’s much better to prevent the recording of a tax lien by filing bankruptcy beforehand. It’s even more important because you can’t get them off your home’s title, under just about any circumstances. You usually have to pay the tax in full, instead of potentially paying nothing.

How Bankruptcy Stops a Tax Lien Recording

How could filing bankruptcy be so powerful that it stops the IRS/state from recording a tax lien on your home?

It’s the law. Federal law is crystal clear that filing bankruptcy stops and prevents “any act to create, perfect, or enforce any lien” against your property. Section 362(a)(4 and 5) of the U.S. Bankruptcy Code. The IRS and the state tax agencies do not dispute this. They cannot record a tax lien against your home or anything you own once you file bankruptcy.

How Long Does This Protection Last?

Under the right circumstances this prevention of a tax lien lasts forever. It’s permanent.

We referred above to income taxes that can be discharged—permanently written off—through bankruptcy. Some can, some can’t. Mostly it depends on how long it’s been since the relevant tax return was due, and was actually submitted. See our earlier blog titled “Bankruptcy Writes Off (Some) Income Taxes.”)

Assume for today that the tax that you’re worried a tax lien will be recorded on qualifies for discharge.

In that case your bankruptcy should in fact discharge that tax debt. So it will be legally gone after your bankruptcy case is finished. With the tax debt gone there is nothing upon which to record a tax lien.

The Huge Difference

Assume, for example, that you owe $10,000 for a couple years of income taxes to the IRS and your state. These taxes qualify for discharge (mostly by being old enough). Your home has a bit of equity but no more than is generally protected by the homestead exemption. Assume the IRS and state have not recorded any tax liens. If you file a consumer bankruptcy (Chapter 7 or Chapter 13) you would very likely no longer owe any of that $10,000 at the completion of your case.

However, now assume the IRS/state record tax liens on that $10,000 in income tax debt before you file bankruptcy. Those liens attach to the equity in your house. Filing bankruptcy does not affect those tax liens. There is no mechanism for removing the tax liens (as there is for qualifying judgment liens). The liens continue to encumber your title and eat into your equity. If you have less than $10,000 in equity the liens encumber your future equity. The IRS/state will almost for sure require you to pay off the lien in order to release it. They’ll get their $10,000 out of you. And they’ll do so simply because they recorded the tax liens before you filed your bankruptcy case.

Chapter 7 vs. Chapter 13

Which of these is better for you if owe income taxes and are trying to stop the recording of a tax lien? We’ll address this in our next blog post (to be posted early next week). If you need to talk with a bankruptcy lawyer before then about this or anything else, please call us.

 

Your Debts in Bankruptcy

February 4th, 2019 at 8:00 am

Bankruptcy is about debts. Different categories of debts are treated differently. The categories are secured, priority and general unsecured 


Your debts are the reason you are reading this. You want to know how bankruptcy would deal with your debts.

  • Will bankruptcy write off all your debts?
  • Can you keep paying some of your debts like a vehicle loan or home mortgage to keep that vehicle or home?
  • What happens to special debts that you can’t write off like child support and some income taxes?

To answer these and other similar questions we start by getting to know the 3 legally different categories of debts: 

  • secured
  • priority
  • general unsecured

Your rights and obligations, and those of the creditor, are different with each category of debt.

Secured Debts

Each of your debts is either secured by something you own or it is not. A secured debt is backed up by a lien, a legal interest of the creditor in some kind of property of yours. See Section 101(37) of the U.S. Bankruptcy Code.

Usually you know whether a debt is secured. For example, in a vehicle loan the vehicle’s title states that your lender is the lienholder. That lien on the title makes the loan secured by the vehicle. That, together with the security agreement you signed, gives the lender certain rights over your vehicle.

Sometimes you don’t know whether a debt is secured. For example, most purchases on major credit cards create a debt that is not secured by whatever you purchased. But some card purchases—such as on some retail store affiliated cards—do create a secured debt. The paperwork that came with your card (which you’ve likely thrown away!) should tell you. Your bankruptcy lawyer will also likely know, or can find out.

Occasionally, a creditor wanted the debt to be secured but it isn’t because the creditor messed up. It didn’t take the legal steps required to make that happen. This could mean that you don’t have to pay the underlying debt and still get to keep the property at issue.

A debt could also be only partially secured. If you owe $10,000 on a vehicle worth only $6,000, the debt is partially secured. It’s secured as to the $6,000 value of the vehicle and unsecured as to the remaining $4,000 of the debt. (See Section 506 of the Bankruptcy Code.) In the right circumstances you would not need to pay the full $10,000 debt and could still keep the vehicle.

Priority Debts

The law has selected some debts to be treated better than others, each for certain specific reasons. For example, child support payments are given many advantages, both inside and outside bankruptcy, because legislatures have decided that paying child support is an extremely high societal priority.

Priority debts are themselves prioritized within their different types. The higher-priority priority debts are treated better than the lower-priority one. Here’s a list of the most common priority debts for consumers or small business owners in order of priority:

  • child and spousal support
  • certain wages and other compensation owed to a debtor’s employees
  • certain (usually more recent) income taxes, and some other kinds of taxes

Priority debts are important in bankruptcy for a practical reason. Often only certain debts get paid, or get paid more than other debts. So a priority debt may get paid in full while other debts get paid little or nothing. We’ll explore how this works in Chapter 7 and Chapter 13 in our upcoming blog posts.

General Unsecured Debts

All debts that are not secured are unsecured debts.  “General” unsecured debts are just unsecured debts that are also not priority debts. So if a debt is not secured and does not fit any of the priority debt types, it’s general unsecured.  

Most people considering bankruptcy have mostly (and sometimes only) general unsecured debts. These include every possible way you can owe a debt. Examples include: most credit cards, just about all medical debts, personal loans without collateral, NSF checks, payday loans without collateral, unpaid rent and utilities, older income taxes, repossessed vehicle balances, most student loans, and other contract or legal claims against you.

Previously secured debts sometimes become general unsecured ones. One example: after a vehicle gets repossessed and sold, any remaining debt is a general unsecured one. Also, previously unsecured debts sometimes get secured. A general unsecured credit card balance can become secured by your home if the creditor sues you, gets a judgment, and records a judgment lien against your home.

 

Starting next week we’ll show how these different categories of debts are treated in bankruptcy.

 

The Surprising Benefits: Chapter 13 Handles an Income Tax Lien on a Tax that Can’t Be Discharged

August 28th, 2018 at 7:00 am

Chapter 13 can be the best way to deal with a nondischargeable tax debt with a recorded lien: it buys more time, protection, and flexibility.

Last week we discussed how Chapter 7 handles a recorded tax lien on a tax that bankruptcy CAN’T discharge. The tax debt already can’t be discharged (legally written off in bankruptcy). So you can’t get out of paying it. The prior recording of a tax lien just adds another reason you have to pay the tax. If you fail to pay the IRS/state can take your assets that are subject to the recorded tax lien.

Filing a Chapter 13 “adjustment of debts” case can be a better way to handle such a tax debt than a Chapter 7 “straight bankruptcy” one.

Buys Time  

Whether you file under Chapter 13 or Chapter 7 does not affect whether you must pay this tax. But filing a Chapter 13 case can often buy you more time.

After completing a Chapter 7 case you must pay the not-dischargeable tax as fast as the IRS/state demands. Otherwise all the powerful tax collection tools can be used against you. With a recorded tax lien already on your real and/or personal property, the IRS/state has even more leverage against you.

What if you can’t pay the tax as fast as demanded? Among other things the IRS/state could garnish your wages and/or bank accounts, and seize your property.

Chapter 13 could prevent all of that because you’d be given as much as 5 years to pay the tax. You and your bankruptcy lawyer would incorporate that tax debt into your Chapter 13 payment plan. You’d pay the IRS/state along with any other special debts that you must pay. Often, you’d pay only a small portion of your remaining debts. Sometimes you’d pay nothing on such debts. As a result you can focus your financial energies for 5 years on your tax debt.

Buys Protection

During that 5 years (which can be as short as 3 years), your paycheck, your checking/savings and other financial accounts, and your property are protected. Bankruptcy’s valuable “automatic stay” protection from collection lasts only 3-4 months in a Chapter 7 case. But this protection lasts the full 3-to-5 years of your Chapter 13 case. The peace of mind that comes from this extended protection is often invaluable.

Buys Flexibility

Sometimes what you need more than time is flexibility in how you pay a tax debt.

You may have some other even higher-priority debt that your financial future depends on. If you’re behind on a vehicle loan you may need to catch up so you’ll have transportation to your job. Or, if you’re late on child support catching up may be crucial to avoiding wage garnishment. Chapter 13 can let you pay some debts ahead of taxes, even nondischargeable taxes with a recorded tax lien.

Or if you can’t pay the taxes until some event in the future, Chapter 13 can buy you that flexibility. The event can even be a few years into the future. For example, if you plan on selling your house and moving away in two years, say, after a child graduates from high school, you may well be able to delay paying all or most of the tax debt until that house sale.

Conclusion

Chapter 13 can be a much better way to deal with a nondischargeable tax debt with a recorded lien. It often gives you more time to pay it, protects you many times longer than Chapter 7, and gives you flexibility that could be crucial in your unique circumstances.

 

The Surprising Benefits: Chapter 13 Stops the Recording of an Income Tax Lien

July 30th, 2018 at 7:00 am

Chapter 7 and 13 can both prevent the recording of a tax lien. But if the tax qualifies for discharge Chapter 7 is quicker and less risky. 

 

Last week we showed how detrimental the recording of an income tax lien can be for you. It can turn a tax that you could fully discharge (legally write off in bankruptcy) into one you’d have to fully pay. We showed how Chapter 7 “straight bankruptcy” could prevent recording of the tax lien and could discharge the tax.

How about a Chapter 13 “adjustment of debts” case? Would filing one also stop an income tax lien recording?  If so, what would happen to that tax debt?

Chapter 13’s Automatic Stay

The filing of a Chapter 13 case stops the recording of a tax lien by the IRS or state just like a Chapter 7 would. Any voluntarily filed bankruptcy case by a person entitled to file that case imposes the “automatic stay” against almost all creditor collection activities against that person and his or her property. (See Sections 301 and 362(a)  of the U.S. Bankruptcy Code.) Those “stayed” or stopped activities specifically include “any act to create, perfect, or enforce” a lien. (See Section 362(a)(4) and (5).)

So filing under Chapter 13 stops a tax lien recording just as fast and just as well a Chapter 7 would.

But Would Chapter 13 Be Better than Chapter 7?

That depends. It depends at the outset on whether the tax is one that qualifies for discharge. If it does qualify (mostly by being old enough) then a Chapter 7 is actually often better.

Under Chapter 7 the automatic stay protection lasts only the 3-4 months that the case is active.  But that’s long enough since the discharge of the tax debt would happen just before the case was closed. Once the tax debt is discharged the IRS/state could no longer do anything to collect that tax. It would certainly have no further ability to record a tax lien on that tax.

What would happen in this situation under Chapter 13, with a tax debt that qualifies for discharge? It would get discharged like under Chapter 7, but with two big differences.

First, the discharge would happened not 3-4 months after case filing but usually 3 to 5 years later.  The automatic stay protection usually lasts throughout that time, preventing tax collection, including the recording of a tax lien. But that long period of time under Chapter 13 does create more opportunities for things to go wrong. That’s all the more true because throughout that time you have various obligations, such as to make monthly Chapter 13 plan payments. If for any reason you don’t successfully complete your Chapter 13 case, the otherwise dischargeable tax debt still won’t get discharged.

Second, under Chapter 13 you may have to pay part of the tax debt before it is discharged. This is in contrast to usually paying nothing on it under Chapter 7. (This assumes that you’d have a “no-asset” Chapter 7 case—in which all of your assets would be “exempt”, protected.) Whether  you’d pay anything on a dischargeable tax debt in a Chapter 13 case, and if so how much, depends on many factors, mostly the nature and amount of your other debts and your income and expenses. But why risk paying something on a tax debt under Chapter 13 if you wouldn’t have to pay anything under Chapter 7?

So Chapter 7 Is Usually Better at Dealing with a Dischargeable Tax Debt?

The answer is likely “yes” if you focus only on this one part of your financial life.

But you may have other reasons to file a Chapter 13 case. For example, you may owe a more recent income tax debt that does not qualify for discharge, in addition to the one that does qualify. Chapter 13 provides a number of significant advantages in dealing with the nondischargeable tax. These could make Chapter 13 much better for you overall.

Or you may have considerations nothing to do with taxes, such as being behind on a home mortgage, a vehicle loan, or child support. Chapter 13 gives you huge advantages with each of these kinds of debts. Your bankruptcy lawyer and you will sort out all the advantages and disadvantages of each legal option to choose the best one.

 

A Dozen Surprising Benefits of Bankruptcy

March 19th, 2018 at 7:00 am

Bankruptcy can go beyond giving you immediate and long-term relief from your debts. It comes with many other surprising benefits. 

 

The next 12 blog posts will be about some of the most powerful and surprising benefits of bankruptcy.

You’re likely considering bankruptcy because you’re financially overwhelmed and need relief. You need immediate relief from debt collection pressures. You need long-term relief from having to pay debts you can’t handle. Bankruptcy provides that immediate and long-term relief.

But bankruptcy can often also give you some other rather amazing benefits, beyond the basic relief you expect. The next dozen weekly blog posts will give you details about the following benefits:

1. Get Back Money Recently Paid to a Creditor

Through “preference” law you could get back money you’ve recently paid to a creditor—paid either voluntarily or not.  

2. Undo Judgment Liens on Your Home

Through judgment lien “avoidance” you can often permanently remove a judgment lien, a tremendous practical benefit.   

3. Get Back Your Driver’s License after an Unpaid Judgment

Reinstate your license if you lost it by not paying a debt from an uninsured or underinsured motor vehicle accident.

4. Reinstate Your Driver’s License from Failing to Pay Tickets

Reinstate your license if it had been suspended for unpaid traffic infractions.

5. Get Back Your Just-Repossessed Vehicle

Filing bankruptcy not only prevents vehicle repossession; it may be able to get your vehicle back to you after it’s already been repossessed.

6. Get Out of an Unaffordable Payment Plan with the IRS/State

Bankruptcy comes with a surprising array of tools to use against your tax debts, allowing you to prevent or get you out of an onerous monthly payment plan.

7. Prevent Debt Collections from Re-Starting after Being “Stayed”

Bankruptcy doesn’t stop or only temporarily stops certain select debts from being collected—such as child/spousal support arrearage, recent income taxes, student loans, and debts incurred through fraud. But there are tools bankruptcy provides for resolving special debts like these permanently.

8. Prevent an Income Tax Lien Recording and Its Potentially Huge Damage

An income tax lien can turn a debt that could be discharged—permanently written off—into a debt that you must pay in full. A timely bankruptcy filing can prevent this financial hit.            

9. Bankruptcy Can Often Reduce Some or All of a Tax Lien’s Financial Impact

In some situations a tax lien can be made either wholly or partially ineffective. Besides saving you lots of money you get the peace of mind that your home is not at risk.

10. Avoid Paying Your Ex-Spouse Most of Your Property Settlement Debts

Chapter 13 allows you to discharge—write-off—some or all non-support obligations of your divorce.

11. “Cram down” and Change the Payment Terms of Your Vehicle Loan

If your vehicle loan is more than two and a half years old, you can usually reduce your monthly payments and the total amount you pay on the loan.

12. Get Out of Your Vehicle Lease through Bankruptcy

Leasing is often the cheapest way to have a vehicle short term, but is actually usually the most expensive long-term. Bankruptcy can be the best way to get out of this expensive obligation.

 

Chapter 13 with a 2nd Mortgage, Property Taxes, or Income Tax Lien

December 4th, 2017 at 8:00 am

Chapter 13 can work much better than Chapter 7 if you have a second mortgage, get behind on property taxes, or have a tax lien on your home.


The last two blog posts were about situations in which a homeowner is current on the mortgage but has other debts on the home.  We showed how Chapter 7 “straight bankruptcy” can work well enough in the 6 debt situations we covered.

But Chapter 7 is often not the best option when you have a lien on your home. Chapter 13 comes with better tools for dealing with such debts against your home. Even if you’re current on the mortgage itself, these tools may make Chapter 13 highly worthwhile for you.

We’ll show how Chapter 13 helps in the same 6 debt situations covered in the last two blog posts about Chapter 7. We’ll cover the first 3 today and the other 3 in a couple days.

Here are the first 3 debt situations:

  1. Second or third mortgage
  2. Property tax
  3. Income tax lien recorded on your home

1. Second or Third Mortgage

Chapter 13 helps in two major ways with a second or third mortgage that aren’t available under Chapter 7.

First, you may have the option to “strip” a junior mortgage from your home’s title. If so, that debt would no longer be secured by your home. You would not have to pay your monthly 2nd/3rd mortgage payment. You would only pay on the 2nd/3rd mortgage balance during your Chapter 13 payment plan to the extent you had available funds to pay it, if at all. Then at the end of your case the remaining balance would be “discharged”—legally, permanently written off.

Your home qualifies for a 2nd mortgage “strip” if it is worth less than your first mortgage debt balance. Then Chapter 13 allows you to have the bankruptcy judge declare that the second mortgage debt is unsecured. After all, then there’s no remaining equity for the second mortgage. (This also works with a third mortgage if the home is worth less than the combination of the first and second mortgage debt amounts.)

The second way that Chapter 13 works better on a second or third mortgage is if you’re way behind on the monthly payments. Chapter 7 is fine if the lender will give you enough time to catch up at a reasonable pace. But second and third mortgage lenders usually have more exposure than first mortgage lenders. They have less equity protecting them. They could lose their entire debt by being foreclosed out by the first mortgage lender. So second/third mortgage lenders tend to be more demanding and less flexible about catch-up payments.

Chapter 13 is a great way to force them to give you more time—up to 5 years if needed. Plus, your Chapter 13 catch-up payments can work around other important debts that you need to pay.

2. Property Tax

If you fall behind on your home’s property taxes, your mortgage lender will become quite unhappy very quickly. Even if you’re current on your mortgage, falling behind on property taxes is a separate basis for your lender’s foreclosure. It usually takes years of being behind before your property tax authority itself would do a tax foreclosure. But your mortgage lender gets very nervous because if that were to ever happen it would lose rights to the property as well. Plus, your lender sees falling behind on property taxes as a sign you’re not financially responsible or capable. For these reasons it’s a breach of your mortgage contract.

After falling behind on property taxes it’s difficult to catch up in the midst of your other financial pressures. Chapter 13 can help tremendously through a combination of two benefits. First, you get up to 5 years to catch up, making doing so more feasible. Second, you are protected from BOTH a tax foreclosure and your lender’s foreclosure. So using Chapter 13 to bring our property taxes current is often the best way to do so.

3. Income Tax Lien

Chapter 13 can be the best way to deal with an income tax lien on your home, in various scenarios.

First, consider if there’s no equity in the home covering that tax lien and the tax itself is dischargeable. (There’s no equity because the mortgage and any other prior liens total more than the home’s value. The tax itself is discharged usually because it’s old enough.) If so, then in Chapter 13 that tax is treated as a general unsecured debt. It’s lumped in with your other general unsecured debts, usually not increasing how much you pay into your plan.

Second, if equity in your home covers the full amount of the tax lien, Chapter 13 provides a flexible and safe way to pay the tax. The IRS/state loses most of its scary leverage over you. You simply arrange to pay the tax (and interest) over the 3-to-5-year life of your Chapter 13 payment plan. You protect your home while fitting that tax obligation into your budget and around any other urgent debts.

Third, if equity in your home covers a portion of the tax lien, you only pay that portion as a secured debt. And as just stated, you pay this through your plan safely and flexibly. This is much better than being leveraged into paying the full amount at the risk of losing your home.

 

Your Paid-Current Home Mortgage in Chapter 7 and 13

November 29th, 2017 at 8:00 am

There are scenarios when you are current on your home mortgage and are dealing with other home-related debts where Chapter 7 works well.

 

You’re current on your home mortgage payment, although you’ve been struggling mightily to keep it that way. You’re thinking very seriously about getting some financial help through bankruptcy. But you absolutely want to keep the home that you’ve fought so hard to keep current.

You’re trying to decide between Chapter 7 and Chapter 13, and are about to see a bankruptcy lawyer. So far you see some advantage in one or the other, or maybe in both. Maybe Chapter 7 is attractive because it seems easier and quicker. Or maybe Chapter 13 looks better because it handles certain of your special debts better. Either way you want to make sure you can keep paying your mortgage so you can keep your home.

How does this work in Chapter 7 and Chapter 13? Today we’ll start with Chapter 7, and get to Chapter 13 later.

Chapter 7

If you’re current on your home mortgage payments you can virtually always keep your home under Chapter 7 “straight bankruptcy.”

A big set of considerations is whether you are also current on and/or have manageable ways to deal with other debts on your home.

Other Home-Related Debts

There are other debts related to your home that can cause significant problems even if you’re current on your mortgage. Some of these debts are better handled under Chapter 13 “adjustment of debts.” Some are tremendously better under Chapter 13. On the other hand some are handled just fine under Chapter 7. How these considerations apply to your situation can often affect which of these two options would be better for you.

These other home-related debts include the following:

  1. Second or third mortgages
  2. Property taxes
  3. Income tax owed with a lien recorded on your home
  4. Judgment with a lien attached to your home
  5. Homeowner association debt with a lien
  6. Child/spousal support unpaid with a lien

Current on or Make Arrangements to Pay Home-Related Debts

Chapter 7 likely makes sense in the following situations with the types of debts just listed above. Generally these are when you’re either current on these debts or can make reasonable arrangements to pay them. We’ll cover the first 3 of these types of debts today and the other three in our next blog post.

1. Second or third mortgages:

Chapter 7 makes more sense if your home is worth than your first mortgage debt balance. (Or the combination of your first and second mortgage balances if you have a third mortgage.) Plus you’re current on your second (and, if applicable, your third) mortgage. If you’re not current you’ll be able to catch up fast enough to satisfy that mortgage lender.

If, however, your home is worth less than your first mortgage, you may be able to “strip” your second mortgage from your home’s title. This is only available through Chapter 13. “Stripping” your second/third mortgage could save you a tremendous amount of money. That would often make Chapter 13 a potentially much better option. (Similarly if you have a third mortgage and your home is worth no more than the first two mortgage balances.)

Also, if you are significantly behind on your second and/or third mortgage but don’t qualify for “stripping” that mortgage, you may need the extra help that Chapter 13 can give in getting caught up.

2. Property taxes:

If you’re current on your property taxes of course you’ll need to stay current. Discharging all or most of your other debts in a Chapter 7 case should make this easier.

If you aren’t current you’ll need to do so quickly or else your mortgage lender will be very unhappy. Even if current on your mortgage, falling behind on your taxes is a separate basis for foreclosure by your lender. If you can’t catch up fast enough on your property taxes to satisfy your lender, you may need Chapter 13 to buy more time.

3. Income tax owed with a lien recorded on your home: 

Usually, under Chapter 7 you have to pay a tax that is backed up by a lien on your home. You also have to pay the ongoing interest and penalties. If the debt is relatively small, and you can make the monthly payments required by the IRS or state, Chapter 7 may be your best option.

However, is the underlying income tax old enough so that it could be discharged if there was no lien? Is there insufficient equity in the home to cover the entire tax lien? In these situations you may avoid paying such a tax, or paying only a portion, under Chapter 13.

(Again, we’ll cover the final three types of debts listed above in our next post in a couple days.)

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top