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Archive for the ‘tax liens’ tag

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.

 

Include 2018 Income Taxes in a Chapter 13 Case Filed in 2019

January 21st, 2019 at 8:00 am

Do you expect to owe income taxes for the 2018 tax year? Starting January 1, 2019 you can wrap that tax into a new Chapter 13 payment plan. 

 

Have you been considering filing bankruptcy and now also expect to owe income taxes for 2018? If so, the start of 2019 gives you more reason to file a Chapter 13 “adjustment of debts” case.

Why? Because filing in 2019 allows you to include 2018 income taxes into your payment plan. That gives you major advantages:

  1. Saves you money on your payment of the 2018 tax
  2. Gives you some very valuable flexibility
  3. Stops tax collections and a tax lien on the 2018 tax

1. Save Money

Wrapping your 2018 income tax debt into a Chapter 13 payment plan usually allows you to pay no more interest and penalties on that tax. The savings can be much more than you think.

You’ll have to pay the 2018 base income tax itself in full, but usually not the interest or penalties. The base tax itself is a “priority” debt that you have to pay. But almost always no interest or penalties accrue on that tax (as long as you finish the case successfully).  

This especially helpful because practically speaking you’d probably not pay that 2018 tax for quite  a while:

  • If you don’t file bankruptcy your other financial pressures would likely prevent you from paying that tax quickly. You might even be tempted to put off filing the tax return, thereby aggravating the problem. The interest and penalties would accrue fast.
  • If you do file a Chapter 13 case in your payment plan you’d most likely pay other even higher priority debts ahead of the 2018 tax. There’s a good chance that tax wouldn’t get paid until near the end of your 3-to-5-year plan. A huge amount of interest and penalties would accrue in the meantime.

2. Valuable Flexibility

Wrapping your 2015 taxes into a Chapter 13 payment plan gives you tremendous flexibility in paying the tax. This can be a real game changer, especially when you have other financial obligations that can’t wait. Chapter 13 allows you to delay paying your 2018 tax debt until you can afford doing so AFTER paying, for example:

  • home mortgage arrearage to save your home
  • unpaid real property taxes, which usually accrue interest at a high rate
  • vehicle loan arrearage or “cramdown” payments to keep your vehicle
  • child or spousal support arrearage
  • other years’ income taxes, including protecting a home or other possession from previously recorded liens

3. Stop Future Tax Collection Including Liens

An important benefit of waiting until 2019 to include the 2018 income tax debt is to stop its aggressive collection. Filing a Chapter 13 case prevents the IRS and/or state from taking just about any collection actions on that tax. This protection against collection stays in effect throughout the years of the case (as long as you fulfill your obligations). Not having to worry about collection of this debt is a huge emotional and practical benefit.

It’s especially nice not have to worry about getting hit with a tax lien. Tax liens are dangerous for a number of reasons. They put your precious assets at risk, thereby giving the IRS/state tremendous leverage. Chapter 13 prevents tax liens while giving you the means to pay off the tax on a relatively flexible budget.

 

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: An Income Tax Lien on a Tax that Can’t Be Discharged

August 20th, 2018 at 7:00 am

A recorded tax lien on a tax that already doesn’t qualify to be discharged makes you all the more want to pay that tax. Chapter 7 might help. 

 

We’ve been talking about the effect of a tax lien on an income tax that bankruptcy CAN discharge. A tax lien can turn that tax from one you don’t have to pay into one you have to pay in full. That’s because a tax lien recording turns an unsecured debt that bankruptcy can write off into a secured one. The tax becomes secured by your real estate, or your personal property, or both. So, if you want to keep what you own, you must pay the tax.

But what about a tax lien on a tax that bankruptcy CAN’T discharge? The tax already doesn’t qualify for being written off. What difference does the recording of a tax lien make on such a tax? And how can bankruptcy help in these situations?

A Tax Lien on a Non-Dischargeable Tax

It’s likely somewhat less common for a tax lien to be recorded on a nondischargeable tax. Broadly speaking, an income tax does not qualify for discharge because it’s not old enough. Often, by the time the IRS/state records a tax lien, the tax at issues has meet the conditions for discharge.

But that certainly isn’t always true. There are many circumstances when a tax has not qualified for bankruptcy discharge and the IRS/state records a tax lien. The taxing authority may be relatively quick on recording a tax lien because of the amount at issue. Or a prior history of unpaid taxes could encourage the same reaction. Also, if you owe more than one year of taxes, a tax lien would often apply to all taxes owed. Some of those taxes may be old enough to qualify for discharge while others may not.

So what’s the practical effect of a tax lien recording on a tax that already doesn’t qualify for discharge? The effect is much less than it would be on a dischargeable tax—making you pay a tax you could have avoided paying. In both situations the tax lien turns an unsecured tax into a secured one. With a nondischargeable tax this simply means that you have one more reason to pay a tax which you already had to pay after a Chapter 7 bankruptcy. Besides their usual collection tools, the IRS/state can now take your assets if you don’t pay.

Chapter 7’s Effect

Filing Chapter 7 only makes sense when you have a recorded tax lien secured by assets you own and want to keep (worth at least  the amount of the tax) if you are prepared to pay the tax. That’s true if the tax at issue is dischargeable or not dischargeable. With a nondischargeable tax that’s all the more true—the lien just gives you more reason to pay the tax. It gives you more reason to pay it more quickly.

There are concrete ways that a recorded tax lien gives the IRS/state that much more leverage to make you pay. The lien increases the ways the IRS/state can directly hurt you, through the seizure of your assets. In the case of a tax lien on a home, it can prevent you from refinancing your mortgage. It could even jeopardize the sale of a home. The lien is also a black mark on your credit record.

You don’t have to be prepared to pay it in full. But you need to have the cash flow—after discharging your other debts—to make appropriate monthly payments. Or, in special circumstances, you need to have strong confidence that you can successfully reduce or eliminate the tax through an offer in compromise.

What If You Can’t Pay, or Not Fast Enough?

Chapter 13 is a better option if you can’t pay the tax at issue fast enough to satisfy the IRS/state. We’ll tell you about this next week.

 

The Surprising Benefits: Chapter 7 AFTER the Recording of an Income Tax Lien

August 6th, 2018 at 7:00 am

Under certain circumstances a recorded tax lien does NOT require you to pay a dischargeable tax after Chapter 7, or at least not in full.

 

The last two blog posts have been about the benefits of preventing an income tax lien recording by filing bankruptcy. That’s especially helpful if the tax at issue is an older one that can be discharged—legally written off. The recording of a tax lien can turn such a tax debt from one you don’t have to pay at all into one that you have to pay in full. (See the IRS Notice of Federal Tax Lien form.)

But what if the IRS or state has already recorded a tax lien against you, before you could file bankruptcy? You’re likely in even more financial distress after that tax lien recording than you were before. Could filing bankruptcy still help with that tax debt even after the lien recording?

Yes, both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” could help. They could each do so in different ways. And they could each help whether the tax at issue met the conditions for discharge or instead was a newer tax that did not.

Today’s blog post covers how Chapter 7 can help with a recorded tax lien on a dischargeable tax debt. We’ll cover how Chapter 13 helps in this same tax situation next week.

The Effect of a Tax Lien Recording

In most situations the recording of a tax lien on an otherwise dischargeable tax requires to pay that tax. Again, it turns a tax that you wouldn’t have had to pay into one you have to pay in full.

How does it do that? Basically, IRS’/state’s recording of a tax lien turns an unsecured debt into a secured one. The tax meets the conditions for discharge (mostly by being old enough), but the IRS/state now has rights over your assets. You have to pay the otherwise dischargeable tax if you don’t want to lose those assets.

What assets? Which of your assets would you lose after the recording of a tax lien if you didn’t pay the tax? That’s a crucial question. That’s because under certain circumstances you might not need to pay all the tax, even after a tax lien recording.  You might not have to pay any of the tax. It depends on which of your assets, if any, the tax lien attached to.

Assets Attached by the Tax Lien

Let’s be clear. Most of the time the recording of a tax lien results in you having to pay the tax. That’s because that tax lien attaches to your assets or property that you don’t want to lose. A recorded IRS Notice of Federal Tax Lien, for example, applies to “all property and rights to property belonging to this taxpayer for the amount of these taxes… .”  So if it applies to everything that belongs to you, you pay the tax to avoid losing those assets.

But sometimes the tax lien might attach to little, or even nothing, of value. Or what it attaches to is worth much less than the tax debt. Then you may not end up paying the whole tax debt amount, or even any of it. (See the IRS’ Guidelines for Processing Notice of Federal Tax Lien Documents, including about lien releases and withdrawals.)

Examples

For example, assume you owe $10,000 in old, dischargeable income taxes but own very little—say a total of $2,500 fair market value in household goods and personal effects. There’s a recorded tax lien on that $10,000 debt covering all your property. With a Chapter 7 case you discharge the $10,000 debt, but recorded tax lien on the $2,500 in property survives. The IRS/state has limited leverage in making you pay any more than $2,500. So there’s a good chance you could settle the matter by agreeing to pay around that amount.

Another example: the IRS/state has recorded a tax lien in your county real estate recorder’s office, placing a lien on your home. (Under many state’s laws that recorded lien would only apply to real estate, not to any other personal assets.) But what if you do not own a home or any other real estate in that county? What if you recently lost your home to foreclosure? Or what if your home has no equity at that time and likely won’t for many years? In these scenarios the IRS/state would have to concede that its lien is essentially worthless. Your bankruptcy lawyer may well be able to convince the IRS/state to release or withdraw its lien as being of no collection value.  

 

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.

 

The Surprising Benefits: Chapter 7 Stops the Recording of an Income Tax Lien

July 23rd, 2018 at 7:00 am

The recording of a tax lien often immediately turns an unsecured debt into a secured one, forcing you to pay what you could have written off.

 

If you owe income taxes, stopping the IRS or state record a tax lien can be a huge benefit of filing bankruptcy. How much of a benefit turns on details about the taxes you owe and the type of bankruptcy you file. Today and in our next blog post we’ll look at income taxes that would be discharged (forever written off in full). Today we focus  on the benefits of filing Chapter 7; next week we’ll do the same for Chapter 13.

Secured and Unsecured Debts in Bankruptcy

The leverage that any creditor has over you depends a lot on whether its debt is secured by your property. For example, if a debt is secured by your home, the home is collateral on that debt. In most situations even after filing bankruptcy you have to either pay the debt or you could lose the home.

The Effect of a Tax Lien

If you can’t pay an income tax, that tax debt is an unsecured one. It’s not secured by anything you own. The IRS and state taxing authorities have some powerful collection techniques they can use to collect the tax. But they can’t simply take anything of yours to pay off the tax debt. That’s because that tax debt is not secured by anything you own.

This completely changes when the IRS/state records a tax lien against your tax debt. The recording legally converts the unsecured tax debt into a debt secured by your property. Which property becomes security against that particular tax debt depends on the details of 1) the tax lien itself and 2) your state’s property laws.

But regardless of these details, IRS/state tax liens can potentially turn pretty much everything you own into security on that tax debt. That means that if you don’t pay the tax, the IRS/state can often take whatever you own in payment of that tax debt. Usually the practical result is not that they take everything, or even anything. Rather, you end up paying the tax debt, sooner or later.

Unsecured Older Income Tax Debts in Bankruptcy

Contrast that from what would happen to that tax if there was no recorded tax lien.

Most ordinary unsecured debts can be legally forever written off in bankruptcy. This is true of some income tax debts as well, if they meet certain conditions. Basically, bankruptcy discharges (writes off) income taxes for which the tax return:

  • was due more than 3 years before your bankruptcy case is filed, AND
  • was in fact filed more than 2 years before bankruptcy.

An Older Income Tax Debt WITHOUT a Tax Lien Under Chapter 7

If you meet the above 2 conditions (and a couple other seldom applicable ones), filing Chapter 7 will simply forever discharge that tax debt. Within about 3-4 months after you file the case, it will be legally gone. You will not have to pay it.

You filed bankruptcy in time to stop the IRS/state from recording a tax lien. And after discharge they’ll never be able to record a lien, or collect in any other wayr.

An Older Income Tax Debt WITH a Tax Lien Under Chapter 7

But it’s completely different if you did not file bankruptcy until after the tax lien recording.

If the tax debt meets the timing conditions, your Chapter 7 filing would technically discharge the tax debt itself. However, the IRS/state would still have a lien on your property after the bankruptcy case was completed.

Because of this surviving tax lien, the IRS/state would at that point be able to exert its rights under the lien. That means it could take and sell whatever property the lien attached to. That would usually be all your personal property or your real estate, or possibly both.

To prevent this from happening, you’d want to contact the IRS/state to make payment arrangements. As mentioned above, the result is usually that you have to pay the tax in full, along with its continually accruing tax penalties and interest.

The Lesson

The lesson is very clear. If you owe income taxes, file bankruptcy before the tax authorities record a tax lien. If the tax you owe meets the timing conditions, you’ll be able discharge the entire tax and pay nothing on it.

 

The Surprising Benefits: Stop Income Tax Collection

June 25th, 2018 at 7:00 am

Income tax debts can be handled in bankruptcy more than you think. This is true even with those taxes that are too new to be discharged. 

 

The Automatic Staying, and the Discharge, of Income Tax Debts

Sometimes people are surprised to learn that filing bankruptcy gives you power over income taxes. It does so in two big ways. First, filing bankruptcy stops the IRS and state from collecting your tax debts—either temporarily or permanently. This is the “automatic stay” applicable to pretty much all of your creditors. Second, bankruptcy permanently writes off (“discharges”) some income tax debts—generally older taxes.

If all the income taxes you owe qualify for discharge, then your situation is quite straightforward. You file a Chapter 7 “straight bankruptcy” case, which stops any ongoing tax collection during the case. Then 3-4 months later, near the end of the Chapter 7 case, your tax debt is discharged. The “automatic stay” protection against tax collection ends. But you no longer need to worry about tax collection because you no long owe any taxes.

Or if instead you file a Chapter 13 “adjustment of debts” case (for reasons other than the tax debt), there’s a similar result. The dischargeable income taxes are treated just like your other “general unsecured” debts. They only get paid to the extent you can afford to do so, if at all, during your case. Often, during the 3-5-year Chapter 13 payment plan most or all of your available money goes elsewhere. It goes towards priority debts like child/spousal support or more recent taxes. Or it goes to catch up on a home mortgage or vehicle loan payments. Regardless how much, if any, you pay on the dischargeable taxes, at the end of your case the rest is discharged. So, as with Chapter 7, you then owe no more on those taxes so you don’t need to worry about any more tax collection.

The Expiring Automatic Stay and Nondischargeable Income Taxes

But what happens if some or all of your income tax debts do not qualify for discharge?  The “automatic stay” does still go into effect as to those nondischargeable taxes. Your filing of a Chapter 7 case gives you a break from most collection actions of the IRS and/or state. If you are being garnished, that would stop. If the IRS/state was about to record a tax lien against your home, that would be prevented. If you are being pressured to enter into a monthly tax payment plan, that pressure would stop.

But this break from collection would not last long.  The “automatic stay” expires in a Chapter 7 case at “the time a discharge is granted.” (See Section 362(c)(2)(C) of the U.S. Bankruptcy Code about the expiration of the “automatic stay.”) In just about all consumer Chapter 7 cases the bankruptcy court grants the discharge only 3-4 months after case filing. So you get a break but not much of one.

So what do you do if you have income taxes that would not be discharged in a Chapter 7 case?

The Chapter 7 Solution

If you filed a Chapter 7 case, it may discharge enough of your other debts that you could afford to enter into a monthly installment payment plan with the IRS/state for the remaining tax debts. The discharged debts may include some older, dischargeable income taxes, leaving you with less tax liability to still pay.

If discharging other debts leaves you in a position to pay your remaining tax debts over time, you (or your lawyer) should contact the tax authority immediately after the discharge to make payment arrangements. It may make sense to make contact even earlier so that the IRS/state knows your intentions. Ask your bankruptcy lawyer about the best timing.

You might also qualify for a reduction in the surviving tax debt amount. The IRS has a procedure for “offers in compromise” to settle a tax debt by paying less than the full balance. Most states have similar procedures. These are somewhat complicated to go through. You should not enter into such an attempt without getting solid legal advice about your chances of being successful.  

The Chapter 13 Solution

Your financial situation after a Chapter 7 discharge may not allow you to pay off the remaining income tax debts through a tax payment plan. You may not have enough cash flow to pay it off fast enough to qualify. Furthermore, interest and tax penalties will continue to accrue, requiring you to pay substantially more over time.

You may also not be a good candidate for getting a reduction in the tax amount through a “compromise.”

So if instead you file a Chapter 13 case, the protection of the “automatic stay” remains in effect throughout the 3-to-5-year length of the case. This gives you up to 5 years to pay off the nondischargeable income taxes without any tax collections against you. This allows you to pay off those taxes under very flexible terms. You can often pay other even more urgent debts—like child support or home mortgage arrearages—ahead of the taxes.

Usually you don’t have to pay any additional interest and penalties. That alone could save you a significant amount, enabling you to pay off the tax faster and easier.

Also, the IRS/state can’t record a tax lien against you during the Chapter 13 case. That takes significant leverage away from the taxing authority. And if a tax lien had already been recorded against you, Chapter 13 usually can deal with it very favorably.

Overall, if a Chapter 7 would leave you too much at the mercy of the IRS/state, Chapter 13 is often a good alternative.

 

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