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Archive for the ‘tax foreclosure’ tag

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.

 

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.

 

Dealing with Unpaid Property Taxes on Your Home

May 18th, 2016 at 7:00 am

Catching up on property taxes benefits both you and your mortgage lender. Chapter 13 helps you pull this off under much less pressure.

 

Slipping Behind on Property Taxes

If you’ve fallen behind on your mortgage payments, you’ve likely also fallen behind on your property taxes.

You may be required to pay those taxes as part of your mortgage payment. So not paying the mortgage automatically means you’re not paying the property taxes.

Or you may be supposed to pay the property taxes directly, separate from your mortgage. So you’ve not paid the property taxes because the mortgage lender is much quicker to complain and makes more noise if you don’t pay the mortgage.  So you pay that as much as you can instead of the property taxes.

Either way you fall behind on the property taxes. So how to solve this problem?

Some Help from Chapter 7 “Straight Bankruptcy”

Two blog posts ago we explained how Chapter 7 can enable people to keep their home as long as they can catch up on their unpaid mortgage payments within a few months after filing their bankruptcy case.

That’s all the harder if you are also behind on property taxes.

But in some situations, the filing of a Chapter 7 case allows a homeowner to stop paying a lot of money each month to other creditors, freeing that money to be paid towards the unpaid mortgage and property taxes.

Your Mortgage Lender’s Harsh Leverage

The problem is the impatience of your mortgage lender.

Usually a foreclosure by a property tax agency does not happen until a number of years after you don’t pay a property tax bill. So you’d think you’d have years to get current.

Maybe so if you own the property free and clear of a mortgage.

But not if you have a mortgage. In the reams of paperwork you signed when you got the mortgage you promised your mortgage lender that you would always keep current on the property taxes. So if you don’t, that’s a breach of your mortgage loan. It gives your lender a separate justification for foreclosing on your home, regardless whether or not you are current on the mortgage payments themselves.

Chapter 13 “Adjustment of Debts” Buys Much More Time

A Chapter 13 payment plan gives you time to catch up on your property taxes. And it keeps your mortgage lender off your back while you do so.

Our last blog post showed how Chapter 13 can usually give you as long as 5 years to catch up on missed mortgage payments. Same thing with back property taxes. And same thing if you are behind on both.

Stretching out the catch-up period that long reduces how much you have to pay monthly, on the property taxes or on both the property taxes and the mortgage. That makes catching up easier. If you are far behind, it may make the otherwise impossible become possible.

Chapter 13 Protects Your Home

Chapter 13 cases usually last 3 to 5 years. If you follow the payment plan that you and your lawyer propose and the bankruptcy judge approves, throughout that time you and your home are protected from foreclosure and other collection activity.

This protection applies both to the property tax creditor and to your mortgage lender. You do need to keep current on new tax years and on new mortgage payments as they come due. And you do need to make your “plan payments” so that you are making progress on the past due property taxes (and mortgage payments, if you’re behind on them, too). Or you could lose this protection and this opportunity to get current over time.

Flexibility under Chapter 13

Although Chapter 13 gives you as long as 5 years to catch up on your property taxes, often you’d be able to pay your back property taxes more quickly. That’s because in your Chapter 13 plan you can usually delay paying other creditors while you first catch up on the property taxes. That’s helpful because property taxes tend to have high interest. Besides saving you on interest, you build equity in your home, and satisfy your mortgage lender more quickly.

Chapter 13 is also a particularly good option if you have other liens against the home, such as a second mortgage, or liens for income taxes, for child or spousal support, for a judgment, or just about any other lien. More about those in our upcoming blog posts.

 

A Fresh Start with an Income Tax Lien on Your Home

February 8th, 2016 at 8:00 am

You owe income taxes, and now the IRS or state has recorded a tax lien on your home. Chapter 13 may get rid of both the tax and the lien.

 

Income Taxes that Can Be “Discharged” (Legally Written Off)

If you owe an income tax debt, it can be discharged like most other debts. The tax debt just needs to meet certain conditions for that to happen. Essentially, two conditions have to be met:

  • 3 years must have passed since the tax return for the tax was due, and
  • 2 years must have passed since that tax return was actually submitted to the IRS or state.

There are a couple other possible conditions but they very seldom come into play. So most of the time you can get rid of income tax debts simply by waiting until both of those two periods of time have passed.

If you owe a bunch of income taxes, having that legal obligation lifted off you would sure help you get a fresh start.

But What If a Tax Lien is Recorded against Your Home in the Meantime?

A tax lien recording by the IRS or state can turn a tax debt that you could discharge and legally not pay anything into one that has to be paid in part or in full.

That’s because a recorded tax lien involuntarily turns your home into collateral for payment of the tax. The tax becomes secured by your home.

Look at it this way. You can’t just discharge a mortgage debt through bankruptcy but then keep the home. That’s because the mortgage lender has a right to foreclose on your home if you don’t pay the debt. The lien created by the mortgage survives the bankruptcy discharge of the related debt. Similarly, once the IRS or state record a tax lien, that lien survives a bankruptcy discharge. So even if the tax at issue meets the conditions discussed above so that it could be discharged, the tax lien continues to encumber the home.

This means that after the bankruptcy case would be over, the IRS or state would likely be able to enforce the lien against your home, forcing you to pay the tax debt in order to clear the title to your home.

But What If There’s No Equity in the Home to Cover the Tax Lien?

In a Chapter 7 “straight bankruptcy if a tax lien is recorded before the Chapter 7 case is filed, as just mentioned that tax lien continues in force after the discharge of debts and the closing of the case.

But under certain limited circumstances the IRS/state might release its lien, eventually. For example, your home could be worth much less than the liens that are on the title ahead of the tax lien. Then if there’s no likely chance that there would ever be any equity in the home for the IRS/state upon the sale of the home, it may be persuaded to release the lien. Perhaps this might require paying a relatively small “nuisance value” amount.

However, the IRS/state would not release its tax lien if the home was worth close to the amount of the prior liens. Then any upcoming increase in the home’s value (together with any progress in paying down the mortgage and any other liens) would build equity for the tax lien to attach to. The IRS/state would then likely just wait until you sell or refinance the home. It would then release its lien only when it’s paid in full (including all the interest and penalties that’s accrued in the meantime).

So Chapter 7 is not likely a good way to deal with a tax lien even when there is presently no equity to cover that tax lien.

If No Equity for the Tax Lien under Chapter 13

Chapter 13 “adjustment of debts” can do better.

That’s because Chapter 13 has a very handy legal method through which the IRS/state could be required to release the tax lien if there is no equity in the home for the lien to attach to at the time that the case is filed.

Chapter 13 provides a procedure (unavailable under Chapter 7) by which the bankruptcy judge could determine that the liens ahead of the tax lien eat up all of your home’s equity, leaving none for the tax lien.

As a result the tax debt would treated as a “general unsecured” debt.  It would be lumped in with all your other “bottom-of-the-barrel” debts. You would pay 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. In many situations you would pay little or nothing because you would first be required to pay other legally higher-priority debts.

And even if you do pay a portion of your “general unsecured” debts, adding the tax debt to the rest of your “general unsecured” debts usually doesn’t increase what you pay. That’s because most of the time you pay a fixed amount of that pool of debts. So adding the tax debt simply reduces what the other creditors receive without obligating you to pay more.

At the end of the Chapter 13 case, any portion of the tax debt that hasn’t been paid is forever discharged, and the IRS/state releases its tax lien.

Conclusion

Chapter 13 is likely your best option if 1) you have a tax debt that would qualify for discharge under the timing rules, and 2) the liens ahead of the tax lien are at or close to the value of your home. Unlike Chapter 7, you can legally establish that your home has no equity for the tax lien to attach to, and thus that the tax debt is effectively unsecured. Then at the end of the Chapter 13 case that tax debt is discharged and the tax lien released from your home’s title. You and your home would then indeed have a fresh financial start.

 

Chapter 7 and Chapter 13–Resolving Your Property Tax Debt

October 19th, 2015 at 7:00 am

Bankruptcy helps with your property taxes either by writing off your other debts or by buying you more time to catch up.  

 

Discharge Your Other Debts with Chapter 7 So You Can Pay Your Property Taxes 

If you’ve fallen behind on your property taxes, presumably your income has not been enough to meet your expenses plus payments on your other debts. Sometimes just writing off your other debts would give you enough financial breathing space so that you can catch up on your property taxes.

Find out from your attorney how much time you would have to catch up on your property taxes. You often have quite a long time. But the rules can be very strict about property tax foreclosures, so be absolutely clear about what the true deadlines are.

Some tax agencies will set up a monthly payment plan with you. Find out if that would be available to you and if you could afford the payments once you discharged your other debts.

In these situations a Chapter 7 “straight bankruptcy” may give you all the help you need.

Use the Special Powers of Chapter 13 to Take Care of Property Taxes

But you may not have enough time to pay the taxes before the tax foreclosure.

Or even if the tax foreclosure isn’t right around the corner, you may need more help for the following reasons:

  • Even if your county or tax agency provides the option of an installment payment plan, you can’t afford the monthly payments even after discharging your other debts.
  • A payment plan is not offered by your tax agency.
  • The collection process has gone too far for you to be eligible for a payment plan.
  • You were already in a payment plan but could not pay it as agreed.
  • Your mortgage lender is requiring you to bring the taxes current more quickly, usually on top of initiating its own foreclosure or threatening to do so.

Under the Chapter 13 “adjustment of debts” type of bankruptcy, you can catch-up on your property taxes over a period of as long as 5 years. This reduces each month’s installment payment, making it more manageable. And during that time the tax agency would not be able to foreclose or take any other collection activity—saving you both worry and those extra costs—as long as you fulfill the terms of the court-approved Chapter 13 plan.

Chapter 13 also often can enable you to pay your back property taxes more quickly than if you were in a Chapter 7 case, saving you interest and penalties. This is possible because your plan can delay paying other important creditors, such as the IRS or a spousal support enforcement agency, while you first catch up on the property taxes.

And perhaps of greatest practical importance, Chapter 13 is usually a much better option if you are also behind on your mortgage payments. Most of the time if you are behind on property taxes that means that you are also behind on your mortgage(s). Chapter 13 can be an excellent way to catch up on your mortgage because it also allows you to stretch out your mortgage catch-up payments for up to 5 years. During this time, as long as you meet the terms of your court-approved plan, you and your home will be protected from foreclosure or any other collection efforts by your mortgage company.

 

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210-342-3400

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