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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.


What the IRS/State Can and Can’t Do After You File Bankruptcy

February 16th, 2018 at 8:00 am

Filing bankruptcy stops tax collection just like it stops other debt collection by more conventional creditors. But there are exceptions.  


The last several weeks of blog posts have been about bankruptcy’s “automatic stay” protection from creditor collections.  We’ve also gotten into many of the exceptions to that protection—when certain creditors CAN take certain actions.

Today we focus on some very limited exceptions to the automatic stay protection, those which apply specifically to income taxes. In bankruptcy you don’t want surprises, especially from a tax collector. These limited exceptions are reasonable. But it’ll still help you to understand them in order to not be surprised by them.

Tax Determination is Allowed, Tax Collection is Not

Simply put, the exceptions to the automatic stay protections are about determining the amount of tax owed. The IRS and the state tax authorities can take steps during bankruptcy to figure out how much you owe. They can make you do what the law requires along these lines. For example, they can require you to file your tax returns, regardless that you’ve filed bankruptcy. But then they can’t take any action beyond that to collect any taxes owed.

The IRS/State CAN’T. . .

The automatic stay immediately stops virtually all debt collection activity against you when you file bankruptcy. This protects you, your income, and your assets. Everything is put on hold so that the bankruptcy laws can be applied to your entire financial situation.

Debts that the law discharges—legally writes off—disappear. Other possible debts that the law does not discharge you continue to owe. With income taxes, if they’re old enough and meet other conditions, they’re discharged. Otherwise you’ll either owe them after completing the Chapter 7 case or you’ll pay them through the Chapter 13 case. But in the meantime the IRS and state are forbidden from collecting the debt. They are also forbidden to take any action directly related to collection, like recording a tax lien against your home or vehicle.

So to be clear, the automatic stay exceptions we’re discussing here do NOT allow the tax authorities to take any action to get your money or assets. The IRS and state tax authority can’t start or continue garnishing your paychecks or bank accounts. They can’t levy on (take away) anything else you own. They can’t call you to pay the tax, and can’t send you tax bills.

The IRS/State CAN. . .

As we said above, the taxing authorities can take certain specific steps to determine how much tax you owe. Some of these steps you wouldn’t expect your bankruptcy filing to affect—they’re probably not surprising. You filing bankruptcy does not prevent the IRS/state from doing the following:

  • Start or finish a tax audit “to determine tax liability.” (See Section 362(b)(9)(A) of the Bankruptcy Code.) But there can be no attempt to collect whatever that tax liability ends up being.
  • Send you a notice about the amount of tax that you owe—a “notice of tax deficiency.” (Section 362(b)(9)(B).) That notice is NOT a demand to pay the tax.
  • Demand that you file your tax returns. (Section 362(b)(9)(C).) In fact this step is often essential for the processing of your bankruptcy case.
  • Make an “assessment” of your taxes and issue a “notice and demand for payment.” (Section 362(b)(9)(D).) “Assessment” is a formal determination of the tax amount. The “demand” here is a term of art meaning that you are put on notice that you are obligated to pay the debt. But whether and when you really owe it usually depends on bankruptcy law.


The interplay between bankruptcy law and tax law can be quite complex. The rule of thumb is that bankruptcy stops tax collection but not tax determination. But your situation may have nuances that could make that rule of thumb misleading. If you are in the midst of, or fear, tax collections, be sure to see an experienced bankruptcy lawyer to find out what would happen in your unique situation. And it really does make sense to do so as early as possible. Tax debts are very much an area where early and wise planning could save you a lot of money.


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).

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.


The Tax Exceptions to the Automatic Stay

October 24th, 2016 at 7:00 am

In spite of you filing bankruptcy, the taxing authorities can still take certain very specific actions as exceptions to the automatic stay. 


The last few blog posts have been about bankruptcy’s automatic stay protection from the collection actions of creditors. The last couple of them have been about exceptions to that protection—when certain creditors can take certain actions.

Today we focus on a set of very limited exceptions to the automatic stay which applies specifically to taxes.

What Taxing Authorities CAN’T Do

The automatic stay protections are designed to immediately stop virtually all debt collection activity against you and your assets. The point is to have all creditors stop going after you so that everybody can shift to applying the bankruptcy laws to your financial situation.

Those bankruptcy laws may result in the discharge of a particular tax debt if that tax meets certain conditions. (A “discharge” is a legal, permanent erasing of a debt in bankruptcy.) And if those conditions aren’t met, the tax is not discharged in bankruptcy.

But regardless whether or not a tax is going to be discharged, the automatic stay prevents the taxing authorities from taking the usual actions to collect that tax. The automatic stay tax exceptions do NOT allow them to take any action to get your money or assets. The IRS and state taxing authorities can’t start or continue garnishing (“levying on”) your paychecks. They can’t levy on (take away) anything else you own. They can’t call you to pay the tax. They can’t mail you notices that you must pay the tax (except as stated below).

The Tax Exceptions to the Automatic Stay

What the taxing authorities CAN DO is take certain administrative actions related to DETERMINING the amount of tax you owe, NOT to COLLECTING the tax. So, in spite of you filing bankruptcy, they can do the following:

  • Start or finish a tax audit “to determine tax liability.” (See Section 362(b)(9)(A) of the Bankruptcy Code.)
  • Send you a notice about the amount of tax that you owe—a “notice of tax deficiency.” (Section 362(b)(9)(B).)
  • Demand that you file your tax returns, a legal requirement understandably not affected by your bankruptcy filing, and which indeed is often necessary to be able to administer your bankruptcy case. (Section 362(b)(9)(C).)
  • Make an “assessment” of your taxes and issue a “notice and demand for payment.” (Section 362(b)(9)(D).)
  • Under certain limited circumstances the assessment a tax lien can attach to your personal property and real estate. (Section 362(b)(9)(D).)

Again, other than these limited actions, it’s a violation of the automatic stay and so is illegal for the taxing authorities to take any other collection action against you once you file bankruptcy.


Dealing with a Recorded Income Tax Lien and Preventing Future Ones

July 15th, 2016 at 7:00 am

Chapter 7 sometimes doesn’t give much help with tax liens. But Chapter 13 hugely helps with tax liens already recorded, and stops new liens.


Today we cover the 5th of the 10 ways that Chapter 13 helps you keep your home, which we listed in a recent blog post. Here’s how we had introduced this one:

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

Chapter 7 usually does nothing to address income tax liens that have already been recorded on your home. It also doesn’t prevent future tax liens on income taxes 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 securing release of tax liens. Plus, the IRS/state cannot record a tax lien on income taxes during the years while the Chapter 13 case is active.

Let’s show how this works in practice.

The Example

Assume that you own a home worth $215,000 with a mortgage loan balance of $210,000. The home value has been increasing modestly each year.

You tried to start a business at the beginning of 2012 which you couldn’t really get off the ground so you closed it down at the end of 2013. You worked part-time during those two years to have some income, and the business made some money. But the combined income was not nearly enough. As a result you didn’t have the money to pay estimated self-employment or withholding income taxes during those two years. And before, during and after that two-year period you racked up a bunch of credit card and other debt.

As a result you owe $8,000 in income taxes to the IRS for 2012 and $6,000 for 2013. You’ve filed all tax returns on time, don’t owe anything for 2014 and 2015, nor expect to for 2016. Your credit card and other non-mortgage debts now total $68,000.

You just received a notice that the IRS recorded a tax lien against your home on the $8,000 2012 tax debt. You are strapped, have used up all sources of credit and have fallen behind on some credit card payments. You can’t afford to pay anything to the IRS, and don’t know what to do.

Chapter 7 “Straight Bankruptcy” Not Sufficiently Helpful

At first it looks like a Chapter 7 case would solve many of your financial problems. The question is whether it would solve them adequately.

A Chapter 7 case would likely forever “discharge”—legally write off—all or most of the $68,000 in credit card and other miscellaneous debts. That would no doubt free up a fair amount of cash flow.

The 2012 income tax debt would have met the conditions for discharge (essentially, more than 2 years since the tax return was filed and more than 3 years since that tax return was due). But the new tax lien now recorded against and attached to your home would survive a Chapter 7 bankruptcy.

That means that the IRS can still force you to pay that $8,000 tax debt by sitting on the tax lien and maybe threatening to foreclose on your home. There’s currently only $5,000 in equity in the home ($215,000 value minus $210,000 mortgage), less than the amount of the tax lien. But that equity will likely increase as the home’s value increases and you pay down the mortgage. You will eventually have to pay the tax. In the meantime the tax lien will continue significantly hurting your credit.

On top of that, the $5,000 tax debt for 2013 would not yet meet the conditions for discharge. It’s not yet been 3 years since its April 2014 tax return due date. So you would continue owing that entire $5,000 tax debt. Plus the interest and penalties would just keep accruing. Then just as soon as your Chapter 7 case is completed the IRS would be able to use all of its usual collection powers. That includes recording a tax lien on this 2013 tax debt as well.

So a few month after your Chapter 7 case would be finished you would likely have two tax liens of $8,000 and $5,000 on your home, and have to figure out how to pay them off.

Chapter 13 Often Much Better

As we stated at the beginning, “Chapter 13 provides an efficient and effective procedure for valuing, paying off, and securing release of tax liens.” Here’s how that works.

In the example provided, you and your bankruptcy lawywer would propose a Chapter 13 payment plan that treats the 2012 tax debt as partially secured against your home and partially not secured. That $8,000 tax debt is secured to the extent of $5,000 (again, the $215,000 value minus $210,000 mortgage). The remaining $3,000 of that $8,000 would be declared by the court to be unsecured. That portion would be paid if, and only to the extent, that there was any leftover money to pay it during the course of the Chapter 13 case.

As for the $5,000 in 2013 income taxes, your Chapter 13 payment plan would have to earmark enough to pay that in full as an unsecured “priority” debt. But the interest and penalties would stop accruing, effectively reducing the amount that you’d have to pay. And you’d have a great deal of flexibility when and how it was paid. The payments would be based on your budget and worked around other important debts. And, in contrast to Chapter 7, and very importantly, the IRS would not be able to record a tax lien against your home during the course of your case.

At the successful completion of your case you would have paid off the secured port of the 2012 tax. And so that tax lien would be released. Whatever portion of the unsecured part of that tax would not have been paid would be discharged, along with any unpaid portion of the other $68,000 in debts. The 2013 priority debt would be paid in full. You’d owe no taxes. And other than the mortgage, you’d be altogether debt-free.


Your Secured Debts

June 22nd, 2016 at 7:00 am

Creditors with secured debts often have much more leverage against you than with unsecured debts.


The last couple months we have been discussing your bankruptcy options with debts secured by your vehicle, by your home, and by investment or business real estate. You can have debts secured by many other kinds of security—furniture and appliances, other personal property you buy or else had owned beforehand, business equipment and inventory, personal possessions that are subject to an income tax or judgment lien. These are just some of the possibilities. Before we get into these, and how bankruptcy handles them, let’s get a better understanding of secured debts in general.

Secured Debts

It’s quite simple. An unsecured debt is not legally tied to any interest in or right to anything you own. A secured debt IS legally tied to something you own through a lien on it. A lien is defined in the U.S. Bankruptcy Code as a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37).)

For example, vehicle loan is a secured debt. Your creditor has a lien on your vehicle. Your title shows the creditor as the lienholder on the vehicle. That lien is on the title because of what you agreed to in the documents you signed with that creditor. The lien secures your payment of the debt and your performance of other obligations you agreed to in those documents. If you don’t pay the debt your creditor can of course repossess your vehicle. If you don’t pay insurance and it lapses, your creditor can likely “force-place” its own insurance to protect its security interest in the vehicle and make you pay for that insurance.

Voluntarily and Involuntarily Secured Debts

You intentionally give a creditor a lien by entering into a “security agreement”—part of the paperwork you sign when you buy a vehicle, or when you take out a loan and provide collateral in the form or your vehicle or some other collateral you own. (See Section 101(51 of the Bankruptcy Code.)

But there are many kinds of secured debts in which you don’t directly agree to give a lien on your property but it happens by operation of the law. Generally these happen when you don’t pay an unsecured debt and the law provides ways for the creditor to convert that unsecured debt into a secured one.

If you don’t pay almost any unsecured debt or claim against you, the creditor can file a lawsuit against you. If you lose that lawsuit—which you usually do if you owe the debt or the claim is valid—the creditor gets a judgment against you. That judgment can turn into a judgment lien against your home. That judgment lien gives that creditor certain rights against your home, including often the right to foreclose on that lien to force you to pay that judgment.

If you don’t pay income taxes, the IRS or state tax agency can put a tax lien on both your real estate and personal possessions. That tax lien in effect turns those possessions into collateral on the tax you owe.

There are numerous other similar kinds of liens that can be created on your property.

Debts that May or May Not Be Secured

For a creditor to have a lien in your property—whether voluntary or not on your part—the creditor must initially go through the appropriate legal steps create that lien, to turn that debt into a legally secured one.

As a result some debts that you might think are secured debts are not. For example, when you buy some furniture or appliance, whether the debt you owe is secured—whether the creditor could repossess what you bought if you don’t pay—depends on whether it took the legally necessary steps to create a legally enforceable lien. This depend on whether you sign appropriate paperwork that gives the creditor that right in the contract, and then whether the creditor followed any additional required legal steps to create the lien.  

Sometimes a debt is intended to be secured but the creditor does not do what the law requires, and so the debt ends up being completely unsecured. The creditor would not have rights to repossess whatever of yours it could have otherwise. 


In our next blog post in a couple days we’ll look at how bankruptcy can give you certain powers and advantages over your secured debts.


Dealing with a Recorded Tax Lien FULLY Secured by Home Equity

May 30th, 2016 at 7:00 am

A tax lien fully encumbered by the equity in your home is dangerous. Chapter 13 may be your best option. 


Today we finish a short series of blog posts on income tax liens recorded against your home. Last time we explained how to use Chapter 13 “adjustment of debts” to get the release of a tax lien when there is SOME equity in your home to secure the tax debt. The time before we got into what happens when there’s NO equity in your home to which the tax lien can attach. Today is about tax liens that secure the entire tax debt because the amount of home equity is enough to cover the ENTIRE tax.


To make better sense of this, here are three scenarios to illustrate the three above situations.

All of them involve a homeowner who owns a home worth $190,000 while owing an income tax debt of $20,000. Assume that this tax debt meets the conditions for “discharge”—legal write-off in bankruptcy. That usually just means that the tax return for that income tax debt was due more than 3 years ago and the tax return was submitted to the IRS/state more than 2 year ago.

  • In the first scenario, assume that the mortgage(s) and any other prior liens (such as for property taxes) against this $190,000 home total $180,000. So the home has $10,000 in equity. If the IRS or state tax agency recorded a tax lien against the home on the $20,000 tax, that tax would be partially secured, to the extent of $10,000. See our last blog post for how best to deal with this partially secured situation.
  • In the second scenario, assume that the mortgage(s) and any other prior liens against this $190,000 home total $195,000. Then of course the home has no equity at all. If a tax lien was then recorded on the $20,000 tax debt against the home, it has no home equity to which to attach. So in spite of the tax lien, the tax debt would still be effectively unsecured, at least unless and until equity built up on the home by an increase in its value or pay-down of the prior liens. See two blog posts ago about how best to deal with this completely unsecured situation.
  • In the third scenario, assume that the mortgage(s) and any other prior liens for the $190,000 total only $170,000. Now when a tax lien is recorded against the $20,000 tax debt, there is enough equity in the house to cover that full amount. The tax lien makes the tax debt fully secured. This is what we cover now.

You Must Pay the Tax to Keep the Home

If your home has enough equity to cover the amount of the tax on which the tax lien is recorded, you have to pay the tax. With the recording of the tax lien, your home involuntarily became collateral on the tax debt.

This is true even if that tax would otherwise meets the conditions for being legally discharged—completely written off (by meeting the 2-year and 3-year conditions, and occasionally another condition or two, mentioned above).

A recorded income tax lien—similar to a home mortgage—continues in effect after your bankruptcy case. So if you want to keep the home, again you have to pay the tax.

Because of this drastic effect of a tax lien, as we emphasized in a blog post a week ago, if at all possible try to file bankruptcy before a tax lien is recorded. This is especially true if you qualify for discharge of the tax debt AND there is equity in your home that would be encumbered by a tax lien.

Chapter 7 “Straight Bankruptcy” Might Help

Filing Chapter 7 case my help by:

  • discharging (writing-off) all or most of your other debts so that you could afford to make payments on the income tax debt until it was paid in full, including ongoing interest and penalties, and the tax lien was released from your home’s title.
  • discharging other income taxes that qualify for discharge and don’t yet have a recorded tax lien

But That Often Doesn’t Work

In practice Chapter 7 often isn’t the best option because even after discharging your other debts, you may not qualify for or be able to afford to pay what the IRS/state requires in a monthly installment tax payoff plan.

This would especially be true if you have other special debts to pay that Chapter 7 does not discharge and would have to be paid as well. Examples are student loans and child support arrearage.

Or if you are behind on a vehicle loan, and/or the home’s mortgage, property taxes, or homeowner association dues, you would have to pay these to hang onto the vehicle and/or the home. 

Other obligations like these would likely make it hard to make the required installment payments on the income tax secured against your home by the tax lien.

Chapter 13 Can Be Much Better

Filing a Chapter 13 “adjustment of debts” case can protects you from the tax debt and its tax lien as follows:

  • The IRS/state is stopped from enforcing the tax lien through foreclosure of the lien, or any other collection methods. The protection that in a Chapter 7 case usually lasts only about 4 months, under Chapter 13 lasts throughout your 3-to-5-year payment plan.
  • Your payments on the tax debt at issue can be delayed or reduced while you pay other even more time-pressing debts (such as child support, home mortgage, or vehicle arrearage mentioned above).
  • If your circumstances change during your Chapter 13 payment plan, you can usually adjust your plan payments, including the payments being paid on the income tax debt. Instead of just hoping that the IRS/state would be willing to accept delayed or lower payments, Chapter 13 would very likely give you more flexibility and protection.


When you meet with your bankruptcy lawyer, together look very carefully into whether getting rid of your other debts through Chapter 7 would really free up enough of your cash flow so that you could enter into a reasonable monthly payment plan with the IRS/state.

If not, or if you have other special debts that need the other benefits that Chapter 13 provides, discuss with your attorney if that is the best way for you to go. 


Resolving a Recorded Tax Lien Partly Secured by Home Equity

May 27th, 2016 at 7:00 am

Chapter 13 forces the IRS/state to accept only partial payment on an income tax debt that is only partially secured by a tax lien.


We’re in a short series of blog posts on income tax liens recorded against your home. Last time we explained how to use Chapter 13 “adjustment of debts” to get the release of a tax lien when there is no equity in your home securing that tax lien. That happens when the mortgage(s), property taxes, and other prior liens soak up the whole value of the home.

But what if there is enough equity in the home to cover part of the tax lien but not all of it? That is, the prior liens soak up most of the home’s value but leave SOME equity for the tax lien but not enough to cover the full tax debt.

An Example

This situation will make much more sense with an example.

Take a home is worth $200,000, with a mortgage of $195,000, leaving equity of $5,000. This home equity is increasing over time as the neighborhood home values increase and the mortgage is paid down.

The IRS is owed $20,000 for the 2011 and 2012 tax years. Assume that this $20,000 could normally be “discharged” (legally written off) in a Chapter 7 “straight bankruptcy” without paying anything. That’s because the main conditions for discharge were met in this example: the tax returns for those taxes were due more than 3 years ago and were submitted to the IRS more than 2 year ago.

But recently the IRS recorded a tax lien on the home for that $20,000 owed, securing the tax debt against the home. But there’s currently only $5,000 equity in the home to cover that $20,000 tax lien. What happens?

The Disadvantage under Chapter 7

If no tax lien has been recorded against you and your home, Chapter 7 is an excellent way to get rid of older income tax debts, those that meet both the 2-year and 3-year conditions just mentioned. The problem is that by the time those conditions would be met, there’s a good chance that a tax lien will get recorded. After all, the IRS and state tax agencies know the bankruptcy laws quite well and want to make you pay the taxes!

A recorded tax lien survives a Chapter 7 discharge. So if that lien attached to some equity in the home, you finish the Chapter 7 case with that dangerous tax lien still encumbering your home and that equity. There is no legal mechanism under Chapter 7 to discharge the unsecured part of the tax and just pay on the secured part.

So the IRS or state will use that tax lien as leverage to make you pay as much of the tax as possible. Especially if the value of the home is increasing, the IRS/state will likely be able to make you pay all or most of the tax amount before releasing its tax lien.

The Solution under Chapter 13

Chapter 13 does have exactly the kind of legal mechanism that you need here. Through your court-approved payment plan, the bankruptcy law allows you establish the amount of equity in your home to which an income tax lien attaches as of the time your case is filed. Then that amount—that part of the tax lien—and no more, is paid over time through the Chapter 13 payment plan. That’s the secured part of the tax debt.

In our above example, that’s the $5,000 portion of the $20,000 tax debt, the part secured by the equity in the home.

The rest of the tax beyond the secured part, the additional $15,000 in our example, is treated as a “general unsecured” debt. That means it is grouped with the rest of your debts that are neither secured nor treated in any special way. These debts, including that portion of the taxes, are paid only to the extent that you have money left over after paying off the secured part, and after paying in full all your other legally more important debts.

What’s important to understand is that In practice the unsecured part of the taxes—the $15,000 in our example—usually doesn’t increase the amount you pay into your 3-to-5-year Chapter 13 payment plan payments. This happens one of two ways:

  • Your payment plan doesn’t have any money left over for the “general unsecured” debts, including the unsecured part of the taxes. That’s when you budget only provides you enough “disposable income” over the life of your plan to pay the secured part of the tax and other legally more important debts—like catching up on your home mortgage, paying off your vehicle loan, and paying more recent income taxes that can’t be discharged. This is called a 0% plan—paying nothing of the “general unsecured” debts and paying nothing of the unsecured part of the income tax. In our example, the $15,000 would be paid 0%—it would be paid nothing.
  • In other Chapter 13 cases in which you are paying something to the “general unsecured” debt, that “something” is a definite amount based on what your budget allows. Adding the unsecured part of the lien tax debt to that pool of other “general unsecured” debts does not increase the amount of money you have to pay into that pool. You pay the same amount and that amount is just spread out among more debts, so that the other “general unsecured” debts just get less of that fixed amount that you pay. In our example, if you had $50,000 of other “general unsecured” debts, adding the $15,000 unsecured portion of the taxes would not increase the amount you would pay but rather the remaining $50,000 of debts would just get paid less.


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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