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Archive for the ‘income tax lien’ tag

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.)

 

Dealing with Recorded Tax Liens through Chapter 13

October 30th, 2017 at 7:00 am

A recorded tax lien gives the IRS/state a lot of leverage against you and your home. Chapter 13 can gain you back some of that leverage.  


Stopping Tax Liens by Filing Bankruptcy

In our last blog post we showed how Chapter 13 can buy you more time and flexibility than Chapter 7. We showed an example how that’s especially true if you owe more than one year of income taxes. Our example assumed that two tax years met the conditions to discharge (legally write off) that debt, while another tax year didn’t.

That example assumed that the IRS/state had not yet recorded a tax lien on your home for either tax year. A bankruptcy filing stops a tax lien’s recording. Then if the tax debt is discharged, the debt is gone so there’s no further basis for a tax lien. Or if the tax debt is paid in full (usually through a Chapter 13 payment plan) again there’s no further debt on which to impose a tax lien.

Dealing with Tax Liens under Chapter 13

But what if the IRS/state HAS already recorded a tax lien on your home?

That can cause all kinds of problems. Two weeks ago we wrote about how a tax lien can turn a completely dischargeable tax debt into one you have to pay in full. Beyond that, any tax lien is terrible on your credit report. It can make refinancing your home much harder. It may even add a problematic hurdle in the selling of your home. Even if you have little or no equity in your home, the tax lien can sit on your title until there’s enough equity to pay it in full.

So if you get a tax lien recorded against your home you need to consider your options. Assuming you want to keep your home, filing a Chapter 13 “adjustment of debts” is one option worth understanding.

Let’s take the same example we used in our last blog post, with a few more facts.

Our Example

Assume again that you owe income taxes of $24,000—$8,000 for the each of the 2012, 2013, and 2014 tax years. The 2012 and 2013 taxes meet all the conditions for discharge. The 2014 one doesn’t, mostly because it hasn’t yet been 3 years (as of when this is being written) since the date its tax return was due on April 15, 2015.

The IRS/state has just recorded tax liens on all three tax years against your home. Your home is worth $250,000, and has a $245,000 first mortgage owed on it. So, before the tax liens’ recordings you had $5,000 of equity in the home. Now you have NEGATIVE $19,000 of equity. And you are under the financial risks outlined above from the tax liens.

So on advice of your bankruptcy lawyer you file a Chapter 13 case. You do so because you:

  • can’t afford to pay nearly as much as the IRS/state are demanding each month in monthly installment payments
  • are afraid of the actions the IRS/state can take against you and your home on the tax liens
  • are afraid of the other collection actions they can take on the $24,000 in taxes
  • need a plan for taking care of these taxes in a way that you can reasonably manage

The Example’s Chapter 13 Plan

In this example the $16,000 of 2012 and 2013 tax debts would be treated as “general unsecured” debts. That is, they would but for the tax liens. Now those two tax debt are “secured” against your home because of their tax liens.

However, under Chapter 13 you have the power to establish that they are secured only to the extent of your home’s equity. So, the 2012 debt of $8,000 is secured by the $5,000 equity in the home. The remaining $3,000 is not secured. The 2013 debt of $8,000 has no remaining equity in the home for it to be secured by. So both that and the remaining $3,000 of the 2012 tax it is treated as a “general unsecured” debt.

This means that this $11,000 ($3,000 + $8,000) would be paid—if at all—to the same extent as your other ordinary debts with no collateral. In most Chapter 13 cases there’s only a set amount available to pay to the entire pool of “general unsecured” debts. This means that usually that $11,000 would just go into the pot with those other debts, and you’d pay no more than if there was no such $11,000 tax debt. That $11,000 tax debt just reduces how much other “general unsecured” debts get paid, without increasing how much you pay. In fact, in many bankruptcy courts you’re even allowed to pay nothing to the “general unsecured” debts. That happens if all your money during the life of the plan goes elsewhere.

The “Priority” Tax Debt

And how about the third tax year—2014—which doesn’t meet the conditions for discharge? What affect does its tax lien have on it?

It has no effect because all of the home’s equity has already been absorbed by the 2012 tax year.  This 2014 tax already has to be paid in full through the Chapter 13 payment plan. It’s a “priority” debt.  Had there been equity in the home to cover this lien then you’d also pay interest on this tax. Without any equity this 2014 tax is effectively unsecured. So it’s treated like any other “priority” debt. You have to pay it in full during your 3-to-5-year Chapter 13 payment plan.

So you have up to 5 years to pay the $5,000 secured portion of the 2012 tax and the $8,000 2014 tax. Throughout that payment period you’d be protected from the IRS/state by the “automatic stay.” This usually protects you throughout the years of the case (not for just 3-4 months like Chapter 7). That means no further IRS/state or other creditor actions against your or your house throughout your case.

Your payment plan may or may not include some money to pay towards your “general unsecured” debts. This includes the unsecured part of the 2012 tax and all of the 2013 tax. How much, if any, you’d pay on these would mostly depends on what you could afford to do so, after paying the other taxes. The secured part of the 2012 tax and the 2014 “priority” tax debts would usually get paid in full before the “general unsecured” debts would receive anything.

The End of the Chapter 13 Case

At the end of your successful Chapter 13 case the following would happen:  

  • Having by that point paid off the $5,000 secured part of the 2012 tax debt, the unpaid portion of the remaining $3,000 would be forever discharged.
  • The unpaid portion of the 2013 tax debt would also be discharged.
  • Having by that point paid off the $8,000 “priority” tax debt, any interest and penalties that would have accumulated on that tax would be forever waived.
  • With all your tax debts either paid or discharged, there’d be no further risk of a lien against your home from that tax.
  • You’d be tax-debt-free, and altogether debt-free (except for long-term debt like your home mortgage).

Buy Lots More Time to Deal with Multiple Years of Income Tax Debts

October 27th, 2017 at 7:00 am

If you have an income tax debt that qualifies for discharge and also some tax debt that doesn’t, Chapter 13 is often your best option. 

Stopping Tax Liens through Chapter 13 

In our last blog post we showed how Chapter 7 might prevent an income tax lien from hitting your home. It stops the recording of the tax lien through the power of the “automatic stay,” which stop virtually all creditor collection activities. And then you get a discharge (write-off) of the tax debt.  But then we added a twist: owing one or more additional tax years’ of debt which does not qualify for discharge. What if you have a tax that meets the conditions for discharge and one or more years’ that don’t? We showed how sometimes Chapter 7 can deal with this effectively, if the still-remaining tax debt is manageable.

But what if the taxes you still owe are not manageable? In a Chapter 7 case the protection of the “automatic stay” ends as soon as the case ends, usually just 3-4 months after it’s filed. So after that you could easily get a tax lien recorded against your home for the still-owed taxes.

Last time we ended by saying a Chapter 13 “adjustment of debts” could be a better option in these situations.

An Example

Let’s show how Chapter 13 could be a better option with an example.

Assume that you owe income taxes of $24,000—$8,000 for the each of the 2012, 2013, and 2014 tax years. The 2012 and 2013 taxes meet all the conditions for discharge. The 2014 one doesn’t, mostly because it hasn’t yet been 3 years (as of when this is being written) since the date its tax return was due on April 15, 2015.

On advice of your bankruptcy lawyer you file a Chapter 13 case. You do so because you:

  • couldn’t reliably pay into a monthly installment plan with the IRS/state for the remaining $8,000 tax owed for 2014. That’s because you have some other important debts that would also survive the Chapter 7 case. In particular you’re behind on your home mortgage and child support payments. Support enforcement is getting very aggressive, and you don’t want to lose your house. Chapter 7 would not help with these.
  • don’t qualify for Chapter 7 under the “means test.”  Your income under that test is too high, and your allowed expenses leave you with too much disposable income. You don’t have Chapter 7 as an option.
  • need to file a Chapter 13 case for its other benefits. You want to get lots of protected time to catch up on your first mortgage and your child support. Chapter 13 gives you strong tools for dealing with these special debts (and many others).

(Note that any one of these reasons may well be enough to make Chapter 13 worthwhile or appropriate. The particular combination of facts here would very likely make Chapter 13 the right choice.)

The Example’s Chapter 13 Plan

In this example the $16,000 of 2012 and 2013 tax debts would be treated as “general unsecured” debts. This means that they’d be paid—if at all—to the same extent as your other ordinary debts with no collateral. In most Chapter 13 cases there’s only a set amount available to pay to the entire pool of “general unsecured” debts. This means that usually that $16,000 would just go into the pot with those other debts, and you’d pay no more than if there was no $16,000 tax debt. That $16,000 tax debt just reduces how much other “general unsecured” debts get paid, without increasing how much you pay. In fact, in many bankruptcy courts you’re even allowed to pay nothing to the “general unsecured” debts. That happens if all your money during the life of the plan goes elsewhere.

Speaking of money going elsewhere, you’d pay the remaining $8,000 for the nondischargeable 2013 tax during the course of your 3-to-5-year Chapter 13 payment plan. It’s a “priority” debt, one that you have to pay off during your case. Throughout that 3-to-5-year period you’d be protected from the IRS/state by the “automatic stay.” That’s because it usually protects you throughout the years of the case (not for just 3-4 months like Chapter 7). That means no tax lien being recorded against your house throughout your case.

Your payment plan would also include money to catch up on your home mortgage and on your child support. These two debts could be paid ahead of or alongside the “priority” tax debt.

The End of the Chapter 13 Case

At the end of your successful Chapter 13 case the following would happen:  

  • Having by that point paid off the $8,000 “priority” tax debt, any interest and penalties that would have accumulated on that tax would be forever waived.
  • With that tax debt gone there’d be no further risk of a lien against your home from that tax.
  • To the extent that the $16,000 in older taxes would not be paid, they’d be permanently discharged. (This would usually be most, or sometimes even all, of the $16,000.)
  • Your home mortgage and child support would be caught up as well.
  • You’d be tax-debt-free, and altogether debt-free except for the on-time first mortgage.

 

Chapter 7 Permanently Prevents Tax Liens against Your Home

October 16th, 2017 at 7:00 am

Filing a Chapter 7 case prevents tax liens from hitting your home, and so avoids a dischargeable tax from turning into one you must pay. 

 

Our last blog post was about how filing a Chapter 7 case buys you time with debts on your home. It’s worth expanding on one of those Chapter 7 benefits, one that can go way beyond buying time. It could save you a lot of money, potentially many thousands of dollars.

The Dischargeable Income Tax Scenario

Filing a Chapter 7 bankruptcy can discharge certain, usually older, income tax debts. (See our blog post of this last September 22 about the conditions for writing off income taxes in bankruptcy.) If you file a Chapter 7 case before a tax lien is recorded on a dischargeable tax debt, then that will prevent the IRS or state tax authority from recording that lien against your home. The tax will then be discharged (permanently written off) about 4 months of your bankruptcy filing. After that the IRS/state can never record a lien or take any other collection action on the tax. It’s gone forever, and the threat of a lien against your home is also gone forever.

The Very Bad Alternative

What happens instead if the IRS or state records a lien against your home before you file bankruptcy?

Assume you’d have some equity in your home but no more than the homestead exemption. (That’s the amount of equity that’s protected from most creditors in bankruptcy—the specific amount varies state to state.) If you’d owe a tax debt that would qualify for discharge and the IRS/state had recorded a lien on that debt against your home, that lien would continue on after you’d complete your bankruptcy case. Your homestead exemption would not help with a tax lien. That lien would continue to encumber the equity you have in your home. You’d have to pay the lien in full when you’d sell or refinance your home. The lien would effectively turn a debt that you could have discharged within a few months after filing bankruptcy into an anchor attached to your home.

Assume instead that you’d have no equity in your home. The IRS/state would probably still want to keep its lien against your home. The lien would at the time have no equity to encumber but the lien would still attach to your title. Later the IRS/state could likely renew the lien, leaving it on your home’s title for a very long time. Odds are you’d be forced to pay the tax at some point, maybe when your home’s value increased enough. Instead of you getting the benefit of that equity, it would go to pay a tax that you could have discharged long before, if you’d just filed a bankruptcy case before the tax lien hit your home.

An Example

Let’s say you owe $6,000 in income tax for the 2012 tax year and $3,000 for the 2013 tax year. And this is after you’d paid monthly instalment payments for years. Those amounts include a lot of interest and tax penalties. Assume that both of these tax debts qualify for bankruptcy discharge. (This would mostly be because enough time has passed since their tax returns were due and actually submitted.) Assume also that you own a home worth $250,000 with a $225,000 mortgage. That $25,000 of equity is fully covered by your state’s $30,000 homestead exemption.

The following would happen if you filed a Chapter 7 case with your bankruptcy lawyer before any tax lien was recorded:

  • The “automatic stay” from the bankruptcy filing would immediately prevent the IRS/state from recording a tax lien on your home (or on anything else you own). Your home and its equity would be immediately protected.
  • Both the $6,000 2012 tax debt and the $3,000 2013 one would be discharged about 4 months later.
  • The IRS/state could never file a tax lien on these taxes ever again. They could take no further collection action of any sort. The $9,000 debt would be gone. The IRS’s/state’s ability to attach that debt to your home would be gone as well.

Instead the following would happen if the IRS/state HAD recorded tax liens on both years before you filed a Chapter 7 case:

  • The tax lien recorded against your home would continue on after you filed bankruptcy.
  • The IRS/state would get paid on those liens whenever you sold or refinanced your home, potentially many years later.
  • You would very likely pay $9,000—plus likely lots more interest and penalties—to the IRS/state that otherwise you would not have needed to pay.

 

Special Debts that Can’t Be “Discharged” under Chapter 13

July 22nd, 2016 at 7:00 am

Bankruptcy can’t write off certain kinds of debts. Chapter 13 enables you to prevent liens hitting your home from those debts.

 

Our last blog post was about how Chapter 7 “straight bankruptcy” helps prevent liens on your home arising from special debts. These are debts that can’t be discharged—written off in bankruptcy. Examples of these special debts include recent income taxes and unpaid child or spousal support.

But Chapter 7 has serious practical limitations on how much it can prevent those liens on your home. Chapter 13 “adjustment of debts” is often a much better tool for dealing with income taxes and support. Here’s how we introduced this earlier, focusing now on the Chapter 13 side of this.  

Preventing Liens on Your Home from Debts that Can’t Be Discharged

A Chapter 13 case protects your home from liens much better than Chapter 7. It doesn’t leave you on your own to deal with any remaining debts. Chapter 13 protects you and your home throughout the time that you are paying off those debts through a flexible 3-to-5-year payment plan.

You and your bankruptcy lawyer put together that payment plan based on how much you can afford to pay. The plan is then reviewed and approved by the bankruptcy judge assigned to your case. Creditors have some say about this, but are limited in the arguments they can raise.

Throughout the course of the payment plan, all of your creditors are prevented from putting liens on your home. That includes the especially aggressive creditors like the IRS, state tax entities, ex-spouses, and support enforcement agencies. Then by the time your Chapter 13 case is completed, those special debts have been paid in full or paid current. As a result they can’t threaten you or your home any more.

Here’s how this works in practice.

The Example

Assume that you own a home with some equity—for example a $250,000 home with a $225,000 mortgage. You have no liens on the home’s title so your home has about $25,000 in equity.

Now also assume that you are entitled to a homestead exemption of $25,000. So, all of the $25,000 in your home’s equity is protected by this homestead exemption. This means that all of this home equity is protected from your creditors and from a bankruptcy trustee.

You want to keep your home and preserve the equity you have in it. But you have serious financial problems. You have a whole bunch of credit cards and other debts amounting to $60,000 that are past due. Plus you’ve fallen behind on your $1,000 per month child support payments by 5 months, or $5,000. And you owe $12,000 in income taxes to the IRS for last year and the year before.

The credit cards and miscellaneous debts can be discharged in bankruptcy, but the recent tax and support debts can’t be. So if you file a Chapter 7 case you’re on your own dealing with the surviving tax and support debts.

The Chapter 13 Solution

You’re not on your own with these debts under a Chapter 13 case. You and your home are protected. Here’s how this option would work in this scenario.

  • As to the $12,000 income tax debt that you must pay, you have up to 5 years to do so. During that time the IRS or state can’t take any collection action against you, or your income or assets. That includes not recording any tax liens against your home.
  • In most situations no ongoing interest or penalties would accrue on that $12,000 tax debt during the case. That could save you a fair amount of money, enabling you to pay off the taxes that much faster.
  • You’d have huge flexibility in the payment terms. The payment amounts would be based on what you could afford. Certain other debts could be paid ahead of the taxes, such as the child support, or to catch up on a vehicle loan or home mortgage. Also, the timing of the tax payments could change if your circumstances changed during the course of the case.  
  • As to the $5,000 child support arrearage, you are required to catch up on this, and again you have up to 5 years to do so. Your ex-spouse and support enforcement agency cannot take any collection action against you during this time. That is, they can’t as long as you meet certain strict conditions. You must keep current on any ongoing support payments, and on your Chapter 13 plan payments. But if you just meet these conditions, you and your home are protected.
  • As to the $60,000 in credit cards and other miscellaneous debts, in most cases you would only need to pay those if and to the extent you had money left over to do so. That means that your available funds would first go to pay the tax and support debts. And that’s after you are allowed to spend a reasonable amount of money on living expenses.
  • At the completion of your Chapter 13 payment plan whatever part of that $60,000 in general debts that had not been paid would be discharged—written off forever. Those creditors would never be able to sue you and get a judgment lien on your home.
  • At the point when your Chapter 13 case is finished, you will have paid the taxes and support arrearage in full. So you’d not owe anything to those creditors. They’d have no debt upon which to record a lien on your home.
  • You would have successfully and permanently prevented the IRS/state and ex-spouse/support enforcement from placing a lien on your home.

 

How Chapter 7 Deals with Special Debts that Can’t Be “Discharged”

July 20th, 2016 at 7:00 am

Bankruptcy can’t write off certain kinds of debts. Chapter 7 may give you enough help to avoid liens on your home from those debts 

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 “adjustment of debts” can help you keep your home. Today we get into the 6th of those 10 ways, starting with how Chapter 7 “straight bankruptcy” helps and doesn’t help. Here’s how we introduced this earlier, focusing first today on the Chapter 7 side of this.  

7. Debts Which Cannot Be Discharged Such as Income Taxes & Back Child/Spousal Support

Some special debts cannot be discharged (written off) in bankruptcy. So those creditors can start chasing you on those as soon as you finish a Chapter 7 case. And that’s usually only about three or four months after you start a case. Sometimes sooner. Those creditors generally include the IRS, the state taxing authority, your ex-spouse, and the state or local support enforcement agencies.

These particular creditors often have extraordinary collection powers, including against your home. They can put a tax lien or support lien on the home. Under some circumstances can even seize and sell your home to pay those liens.

The key question is whether Chapter 7 discharges enough debts for you so that you can afford to pay off the debt(s) that isn’t (aren’t) discharged. If so, Chapter 7 would likely be the better option.

Here’s how this works in practice.

The Example

Assume that you own a home with some equity. Say it’s a $200,000 home with an $180,000 mortgage, so on paper you have about $20,000 equity.

Also assume that you are entitled to homestead exemption of $25,000. This means that you can have that much in home equity and protect that equity from your creditors. As a result all of the $20,000 in home equity is protected by this homestead exemption.

You’re in a financial hurt, owing $38,000 in medical bills and $42,000 in credit cards, a total of $80,000. You’ve fallen behind on your $1,000 per month child support payments by 4 months, or $4,000. And you owe $13,000 in income taxes to the IRS for last year and the year before.

You want very much to keep your home. You’ve managed to stay current on the mortgage and the property taxes because it’s been your highest priority. There are no liens against your home’s title other than the mortgage debt itself.

You’ve heard that your ex-spouse is referring the child support debt to the local support enforcement agency. It can and likely will soon put a lien on your home as part of its collections efforts. Same with the IRS.

Those two liens—in the amounts of $4,000, or whatever you owe in child support at the time, and $13,000—would eat up much of your home equity. These liens might even result in the foreclosure or forced sale of your home.

Chapter 7’s Limited Help

Here’s what a Chapter 7 “straight bankruptcy” would likely accomplish, and not accomplish, in this scenario:

  • The “general unsecured” medical bills and credit card debts of $80,000 would very likely be discharged. You would never have to pay them.
  • Older income taxes can be discharged if they meet certain conditions. But taxes from last year and the year before would not be old enough to qualify. So you would continue owing the entire $13,000 tax debt, plus interest and penalties. Those continue to accrue regardless of the Chapter 7 filing.
  • IRS collection efforts, including the recording of a tax lien, would be “stayed,” or temporarily stopped. This “automatic stay” would be effective as of the moment the Chapter 7 case is filed. But it only lasts as long as the case is active. That’s a period of only about 3 or 4 months from the time the case is filed.
  • That means that nothing would stop the IRS from recording a tax lien in the amount of $13,000 as soon as the Chapter 7 case was closed.
  • There’s even less protection as to the child support debt. In fact there’s none. The “automatic stay” does not apply to support obligations under Chapter 7. So your ex-spouse or the support enforcement agency could garnish your paychecks and bank accounts, and very likely take various other aggressive actions against you and your assets and income, at any time, regardless of your Chapter 7 filing. That generally includes recording a lien against your home.
  • Child support debts are not discharged in bankruptcy, under virtually any conditions.

When Chapter 7 Helps Enough

All this means that Chapter 7 would help only if the discharge of the $80,000 in medical and credit card debts would free up enough cash flow to:

  • Enter into a reasonable installment payment plan with the IRS to pay the $13,000, plus ongoing interest and penalties.
  • Negotiate with the ex-spouse or support enforcement agency for a payment plan to catch up on the $4,000 in support arrearage.
  • Do these preferably without the creditor recording a lien against your home.

How likely this is depends on all circumstances.

The IRS is usually quite willing to enter into a monthly installment plan. Its policies have gotten more and more flexible during the last decade or so. Currently the interest rate is relatively low—3% for at least the last several years. Entering into an installment agreement reduces the failure-to-pay penalty of 0.5% per month to 0.25% (or 0.0025) per month.

How cooperative ex-spouses and support enforcement agencies will be of course varies greatly. But as to the latter anyway, they generally prefer voluntary payments to forced ones. And you’d likely save fees and a tremendous amount of frustration if you can avoid the nasty surprises these agencies can spring on you.

But your bankruptcy lawyer may look over your situation and determine that you wouldn’t have the means to keep your post-Chapter 7 creditor(s) happy. If not, Chapter 13 can often be a much better alternative. It is much better at preventing these kinds of creditors from recording liens on your home. We’ll show you how in our next blog post in a couple days

 

Ten Ways to Keep Your Home through Chapter 13

July 1st, 2016 at 7:00 am

These 10 tools, especially used in combination, can defeat your mortgage debt and other home-based challenges.

   

A few blog posts ago we said that while Chapter 7 “straight bankruptcy” strengthens your hand with your secured debts, Chapter 13 can be much stronger. One way that Chapter 13 is stronger is in enabling you to keep things you own which have a secured creditor’s lien on them. Indeed, that’s probably the most common reason for filing a Chapter 13 case—to keep your home, vehicle, and/or other possessions at risk of repossession.

Because Chapter 13 can help you in so many ways keep assets with liens on them, we’ll focus today on just one of those assets, your home. Here are 10 ways that this tool helps you stay in your home.

1. More Time to Catch up on Unpaid Mortgage Payments

Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up. Chapter 13 often gives you years, which greatly reduces how much you have to pay each month to eventually get current. If you are many thousands of dollars behind on your mortgage(s) having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.

2. Stripping Second or Third Mortgage

Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. Chapter 13 gives you the possibility of “stripping” a second or third mortgage lien off your home title, potentially saving you hundreds of dollars monthly, and thousands or even tens of thousands of dollars in the long run. To do so the home value must be no more than the total of the liens legally superior to, or ahead on the title to, the junior mortgage you want to “strip.” In other words, there can be no home equity being encumbered by the mortgage at issue because that equity is fully absorbed by the other earlier liens. “Stripping” a mortgage can save you many hundreds of dollars every month and many thousands of dollars during the life of your home ownership.

3. Much Greater Flexibility in Selling Home

Chapter 7 gives you at most only about three or four months while your mortgage holder can’t foreclose and your other creditors can’t take action against you or your home. In contrast, under Chapter 13 you could potentially be protected for years. You may need to move and sell your home, but not until you are ready to do so. You may need to wait until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, so that you can live in your home in the meantime.

4. Get Current on Past Due Property Taxes

Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the three, four months that the case lasts. Chapter 13 protects you and your home while you gradually catch up on those taxes, in a court-approved plan that also incorporates your mortgage(s) and all other debts.

5. Protection from Both Previously Recorded and Future Income Tax Liens

Chapter 7 usually does nothing to address tax liens that have already been recorded on the home, or to stop future tax liens on income taxes that you continue to owe after the bankruptcy case is completed. In contrast Chapter 13 provides an efficient and effective procedure for valuing, paying off, and getting the release of tax liens. And the IRS/state cannot record a tax lien on income taxes while the Chapter 13 case is active.

6. The Chapter 13 “Super-Discharge”

You can “discharge” (permanently write off) in a Chapter 13 case obligations arising out of a divorce decree dealing with the division of property and the division of debt (but NOT the provisions about child/spousal support). You cannot discharge these non-support divorce debts under Chapter 7.

So if you owe a significant amount of this kind of debt, and there isn’t already a lien on your home securing it, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt.

7. Debts Which Cannot Be Discharged Such as Income Taxes & Back Child/Spousal Support

If you owe any of those special debts which cannot be discharged in bankruptcy, as soon as you finish a Chapter 7 case (usually only about three or four months after you start it) the creditors on those debts can start collecting on them from you. Those particular creditors—such as the IRS, the state taxing authority, the state or local support enforcement agencies, and your ex-spouse—often have extraordinary collection powers. They can put a tax lien or support lien on your home, and under some circumstances can even seize and sell your home to pay those liens.

In great contrast, a Chapter 13 case protects you while you pay off those special debts in a payment plan that you propose and is reviewed and approved by the bankruptcy judge assigned to your case. During the 3-to-5-year plan, all of your creditors—including the ones just mentioned above—are prevented from putting liens on your home. By the completion of your Chapter 13 case those special debts are paid in full or paid current, so that they can’t threaten you or your home any more.

8. “Statutory Liens”: Utility, Contractors, Municipal/Local and Other Involuntary Liens

If you had an involuntary liens imposed by law against your home before you file bankruptcy, those liens would very likely survive a Chapter 7 bankruptcy.

These are called “statutory liens” because they are set up through state statutes, or laws. Examples include a utility lien is for an unpaid utility bill, a contractor’s lien (sometimes called a “mechanic’s” or “materialman’s” lien) is for an unpaid, and usually disputed, home remodeling or repair debt, and local government liens for unpaid fees against your property.

These liens against your home generally survive a Chapter 7 case, and so these creditors would be able either to threaten foreclosure of your home to force payment, or at least would force payment whenever you’d sell or refinance your home. Under Chapter 13, in contrast, the protection for your home would generally continue throughout the three-to-five year case, keeping it safe while you satisfy the lien.

9. Judgment Lien “Avoidance”

A judgment lien is one that is placed on your home after someone (usually a creditor) sues you, gets a judgment against you, and records that judgment in the county where your home is located (or uses whatever the appropriate procedure is in your state).

In bankruptcy a judgment lien can be removed from your home under certain circumstances. Although judgment lien avoidances are available under Chapter 7 as well as Chapter 13, it can often be put to better use in Chapter 13 when used in combination with advantages available only under Chapter 13.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

If you have too much equity in your home—value beyond the homestead exemption’s protection—in a Chapter 7 case you run the risk of a Chapter 7 trustee seizing it to sell and pay the unprotected portion of the proceeds to your creditors. Under Chapter 13, in contrast, you can keep and protect the home by paying those creditors gradually over the course of the up-to-five-year Chapter 13 case.

 

Prevent a Creditor with an Unsecured Debt from Turning it into a Secured Debt

June 29th, 2016 at 7:00 am

Because of Chapter 13’s much more powerful automatic stay, its ability to prevent judgment liens and tax liens is extremely valuable.  

 

Our last blog post described ways that the “automatic stay”—your protection from creditors’ collection actions—is so much more powerful in a Chapter 13 “adjustment of debts” case than in a Chapter 7 “straight bankruptcy.”

One way that this Chapter 13 protection from creditors is better is simply that it lasts much, much longer than under Chapter 7. This benefit is also related to today’s topic, how Chapter 13 can permanently stop unsecured creditors from turning their debts into secured ones. This is an underappreciated advantage of filing a Chapter 13 case.  

Prevent Creditors from Turning Unsecured Debts into Secured Ones

Creditors with secured debts generally have much more leverage than those with unsecured debts. In a Chapter 7 case most unsecured debts get “discharged”—legally written off—without any payment required. In a Chapter 13 case unsecured debts are only paid if and to the extent there is any money left over during the course of the payment plan after paying secured creditors and special “priority” debts (such as unpaid child support and recent income taxes).

Creditors with unsecured debts have a variety of ways of turning those into debts secured against your assets. Two examples are judgment liens and income tax liens, which we’ll discuss more in a moment.

Those liens, as well as other kinds, can turn a debt that can simply be discharged into one that has to be paid in full or in part. Or even if it was a debt that could not have been discharged (such as unpaid child support or recent income taxes), once the creditor has a lien the debt is more dangerous for you, even if you file a bankruptcy afterwards.

Filing bankruptcy—either Chapter 7 or 13—prevents a creditor from converting its unsecured debt into a secured one. The same law—the “automatic stay”—that stops other forms of collection action against you immediately upon the filing of a bankruptcy case, also stops creditors from creating liens against your assets. The U.S. Bankruptcy Code states that filing a bankruptcy “petition… operates as a stay… of–… (5) any act to create… against property of the debtor any lien” that secures a debt existing at the time the petition is filed. (See Section 362(a)(5) of the Bankruptcy Code.)

Preventing Judgment Liens

Any creditor with an unsecured debt you owe can sue you if you do not pay the debt according to its terms. Most of the time such a lawsuit turns into a judgment against you on the debt. State laws determine how the creditor can then collect on the judgment against you. But usually the judgment either automatically becomes a lien against some of your assets or the creditor can take additional steps to create a lien, such as a lien against your home for the amount of the judgment.

As soon as there is a lien, a debt which could otherwise be discharged as an unsecured debt may have to be paid in full or in part in order to get a release of the judgment lien on your real estate or other assets.

Filing either a Chapter 7 or 13 case on a debt that has not yet turned into a judgment will prevent that from happening. Even if a lawsuit has been filed the judgment can be prevented if the bankruptcy is filed quickly enough.

If the debt is the kind that can be discharged in a Chapter 7 case—which includes most unsecured debts—then that will take care of the debt. At the end of the case the debt is discharged and then the creditor has no more debt to sue you for and create a judgment lien on your assets.

But what if the debt is one that is not discharged in the 3 or 4 months that a Chapter 7 case takes to process? If you are accused of having gotten the debt through fraud or misrepresentation there is a good chance the debt would not be discharged in a Chapter 7 case, for example. If the creditor takes appropriate action during the case the debt would not be discharged and the creditor can turn that debt into a judgment and put a lien on your assets.

In a Chapter 13 case you can make arrangements to pay such a fraud/misrepresentation based debt during the course of the 3-to-5-year payment plan. The “automatic stay” prevents the creditor from converting the unsecured debt into a secured one (as long as the creditor does not get extraordinary permission to the contrary from the bankruptcy judge).

Preventing Income Tax Liens

Income tax debts either meet the conditions for being dischargeable in bankruptcy or they don’t meet those conditions. These conditions mostly turn on whether enough time has passed since the tax return at issue was legally due and since the tax return was in fact submitted to the IRS or state tax agency. If the tax meets the conditions for discharge, the tax is simply discharged in a Chapter 7 case, essentially like any other dischargeable debt.

But if the IRS/state records a tax lien before you file a bankruptcy case that turns the unsecured tax into a secured one. Depending on what the tax lien attaches to, you may have to pay the tax in part or in full to get the tax lien released from your assets. So it’s very important to file bankruptcy—either Chapter 7 or 13—before the tax lien is recorded.

But what if the tax is one that does not meet the conditions for discharge? Filing a Chapter 7 case will stop the tax lien for only the 3-4 months that the “automatic stay” is in effect. The IRS/state can record a tax lien on such a tax as soon as your case is closed.

However, if you file a Chapter 13 case instead the IRS/state will be prevented from recording at tax lien throughout the 3-to-5-year period that a case usually lasts. During that period you would pay that tax, on your own schedule and at the same time that you deal with your other important debts. After paying off the tax, without the threat of a recorded tax lien, and completing the case, there would be no more tax debt on which a tax lien could be recorded.

 

Beating a Recorded Income Tax Lien on Your Home

May 25th, 2016 at 7:00 am

Once an income tax lien is recorded, Chapter 13 gives you a tool that may enable you to pay no more and yet get a release of that tax lien.

 

Our last blog post was about using bankruptcy to prevent the IRS or state income tax authority from recording a tax lien on your home. But what if a tax lien has already been recorded?

The Challenge of a Tax Lien

In our last blog we also focused on how bad it is for you if the IRS/state records a tax lien 1) on an income tax debt that could otherwise be discharged (legally written off) 2) against a home that has equity against which that tax lien can attach. Then the problem is that the tax can no longer be discharged since it’s now secured by your home.

But what if the home has no present equity for the tax lien to attach to?

Dealing with a Tax Lien with No Home Equity to Attach

Maybe the IRS/state didn’t know that there was no equity when it recorded the tax lien, or maybe it just didn’t care. A recorded tax lien is a matter of public record. It hurts your credit record and your ability to sell and refinance the home. It puts you under pressure to pay the underlying tax debt. The IRS and state know this and that lien hurts you regardless that your home may have no present equity.

Filing a Chapter 7 “straight bankruptcy” usually doesn’t help because an income tax lien is not affected by it. The tax lien continues to attach to your home. And within just 3-4 months after the case is filed it’s finished and the IRS/state can resume enforcing the lien.

Determining that a Tax is Unsecured in Spite of the Tax Lien

But filing a Chapter 13 “adjustment of debts” bankruptcy instead DOES help. That’s because it comes with a truly unique tool, the ability to get a legal determination that the home has no equity attachable by the tax lien. You simply establish that as of the time the case was filed the liens that come ahead of the tax lien eat up all of your home’s equity, leaving none for the tax lien. (See Section 506(a) of the U.S. Bankruptcy Code.)

As a result the tax debt is treated as a “general unsecured” debt.  It is put into the pool of all your other “general unsecured” debts—which include medical bills, most credit cards, and all other debts that are not treated special by the bankruptcy laws.   You would pay into that pool, including on that tax debt, only as much as you could afford to pay during the life of your 3-to-5-year Chapter 13 plan, if at all.

Indeed in many situations you would pay little or nothing because you would first be required to pay other higher-priority debts. Again, you would only pay “general unsecured” debts, including the tax debt in issue, to the extent you could afford to do so with any money left over within the length of time that your Chapter 13 plan is required to last.

And in most cases when you do pay some percentage of those “general unsecured” debts, the addition of your tax debt to that pool of your “general unsecured” debts usually doesn’t increase the amount you must pay. That’s because most of the time you pay a fixed amount of money into that pool of debts. So adding the tax debt simply reduces what the other “general unsecured” creditors receive without you paying any more.

Forcing the Release of a Tax Lien When It Does Not Attach to Any Equity

Then at the end of the Chapter 13 case, any portion of the tax debt that hasn’t been paid is discharged, legally written off forever. Then, the IRS/state—regardless how much it’s been paid or not paid—must release its tax lien.

Lack of Equity Fixed As of Date of Filing

The lack of any value in the tax lien is fixed as of the beginning of the Chapter 13 case. So the home’s ongoing appreciation in value (and increase in equity as you pay down mortgage and other debt) is put beyond the reach of the tax lien. The IRS/state does not benefit from the tax lien during the course of the case while you are protected from all collection activity. Then at the end of the case the tax debt is discharged and the tax lien is release.

Under these facts, this is an excellent way to beat a tax lien.

 

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