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Archive for the ‘Income Taxes’ Category

Bankruptcy Writes Off (Some) Income Taxes

March 4th, 2019 at 8:00 am

Bankruptcy permanently writes off income taxes, as long as the tax meets certain conditions. For some taxes the conditions are easy to meet. 

 

Bankruptcy DOES Write Off Income Taxes

There are certain very special debts that bankruptcy never writes off. Child and spousal support is a good example. See Sections 523(a)(5) and 101(14A) of the U.S. Bankruptcy Code.

Income taxes are different. Income taxes CAN be written off, as long as you meet a few conditions. These conditions mostly tie in to timing—when the tax was due and when (and whether) you filed its tax return.

The Two Timing Conditions

In most people meeting these conditions is straightforward. You essentially have to file your tax returns and wait long enough to comply with for the following two conditions:

  1. You submitted the pertinent tax return to the IRS/state and did so more than 2 years before filing your bankruptcy case. Section 523(a)(1)(B)(ii) of the Bankruptcy Code.
  2. The legal due date for that tax return was more than 3 years before filing your bankruptcy case. Section 507(a)(8) of the Bankruptcy Code.

For example, assume you owe the IRS $5,000 for the 2014 tax year, and you submitted its tax return a full year late—in April 2016. It’s been more than 2 years since that so you meet the first condition. The legal due date for that tax return was in April 2015, which is more than 3 years ago. So you also meet the second condition. So in most situations bankruptcy would write off that 2014 income tax debt of $5,000.

A Few Important Twists about the Timing

Keep three practical considerations in mind about these two time periods:

  1. The 3-year period only starts to run when the tax return was “last due, including extensions.” Section 523(a)(1)(B)(ii). The 3 years only begins at the extended due date. It’s absolutely crucial that your bankruptcy lawyer gets the correct information from you about whether you got an extension that year.
  2. If you’re cutting it close (because you’re in a big hurry to file), the precise tax return due date can be crucial. Remember that taxes are not always due on April 15 and October 15 (for extensions). Weekends and holidays can push the due date out even several days. That means you may have to wait some extra days to file your bankruptcy case to be able to write off that tax debt.
  3. Careful about making a mistake about whether and when you actually submitted your tax return. It may be worth finding out directly from the IRS/state to avoid getting a rude surprise after filing your bankruptcy case.

Other Uncommon Conditions

There are two other conditions that might possibly apply, in more complicated situations.

  1. More than 240 days must pass from when the IRS/state assessed the income tax to when filing your bankruptcy case. Assessment usually happens within a few weeks after you get your tax returns in to the IRS/state. So usually this condition is easily met. It only tends to apply if assessment gets delayed with a tax audit, litigation in Tax Court, a tax appeal, offer in compromise, and other complications.
  2. Regardless of all these timing rules, you can never write off an income tax based on a fraudulent tax return or if you intentionally evade a tax. This is uncommon. It tends to only come up if you were significantly dishonest with the tax authorities.

Conclusion

In most situations you can write off the tax if you filed your pertinent tax return and both the 2-year and 3-year periods have passed. But the intersection between bankruptcy and income taxes is definitely complicated. Be sure to see a competent bankruptcy lawyer if you owe taxes so that you get the full benefit of the law.

 

If You Owe Both 2018 AND Earlier Income Taxes

January 28th, 2019 at 8:00 am

Do you owe income taxes for the 2018 tax year AND already owe for one or more tax years? Chapter 13 may be an especially good tool for you. 


Last week we got into a big advantage of filing a Chapter 13 “adjustment of debts” case in early 2019. It enables you to include 2018 income taxes into your Chapter 13 payment plan. That would:

  1. Save you money on payment of your 2018 tax
  2. Give you invaluable financial flexibility
  3. Stop any present and future tax collections and the recording and enforcement of a tax lien on the 2018 tax

So Chapter 13 is a helpful tool for dealing with taxes you owe for the 2018 tax year. Sometimes it’s even absolutely indispensable—it solves a debt dilemma that appeared otherwise insolvable.

When You Also Owe Income Taxes for Earlier Years

However, Chapter 13 is a particularly powerful tool if you owe not just for 2018 but for other tax years (or year) as well. This is true wherever you stand with the earlier tax debt, whether:

  1. the IRS/state is now aggressively collecting the taxes
  2. you are currently paying them through an agreed monthly payment plan
  3. you haven’t yet filed the tax returns for the prior years 

1. Dealing with Aggressive Collection of Earlier Tax Debt

Is the IRS/state is currently collecting the earlier taxes through garnishment or some other collection procedures?  Then Chapter 13 would very likely greatly help you with both those earlier taxes and the new 2018 one.

The minute your bankruptcy lawyer files the Chapter 13 case for you all the aggressive tax collection actions will stop. That is the power of bankruptcy’s “automatic stay.” You will have 3 to 5 years to deal with ALL of your debts through a payment plan. This includes all your income taxes. The Chapter 13 payment plan will be based on what you can genuinely afford to pay. You may well not need to pay some of your earlier taxes. You will likely not need to pay any more accruing interest and penalties on ANY of the income taxes. You will not need to worry about tax collections throughout the time you’re in the case—including the recording of tax liens. At the completion of your case you will owe no income taxes. Indeed, you will be debt-free altogether, except for voluntary debt such as a home mortgage.

2. In a Monthly Payment Plan

Are you already in a payment plan with the IRS/state for the prior tax debt? If so, finding out that you owe even more for 2018 can be really frightening.

Those monthly installment payments likely contributed to the fact that you owe for 2018. You know that you have to keep up those monthly payments perfectly to avoid the IRS/state from starting or restarting collection actions against you. So you do everything you can to pay them, including not having enough withheld from your paycheck or not paying enough in quarterly estimated payments for the next year’s taxes. As a result you now owe another bunch of taxes for 2018.

Furthermore, you know that you’ll violate your installment agreement if you don’t stay current in future income taxes. As stated in IRS Form 9465, the Installment Agreement Request form, “you agree to meet all your future tax obligations.” So you know you’ll be in trouble when the IRS/state finds out that you owe for 2018.

Chapter 13 avoids this trouble. As mentioned above, the “automatic stay” immediately protects you from the IRS/state. Your monthly installment plan is cancelled right away. You make no further payments on it once you file you file your Chapter 13 case. All your prior income taxes AND your 2018 one(s) are handled through your Chapter 13 payment plan. You get the financial advantages and the peace-of-mind referenced in the above section. When you successfully complete your Chapter 13 case you’ll be totally free of any tax debt.

3. Not Filing Tax Returns

You may be in the scary situation that you can’t pay your taxes so you don’t file your tax returns.

Sometimes this happens because the tax authorities are already actively trying to collect on earlier tax debt. You can’t pay the earlier debt so you figure what’s the use of adding to the amount you already can’t pay.

Or you may be in an installment payment plan and you don’t want to violate it by admitting you owe more for 2018. You know you’ll be in violation of it upon filing the 2018 tax return, so you simply don’t do so.

Or finally, you haven’t filed a tax return for several years, and you know or guess you owe a lot. Now it’s time to file for 2018 and you figure you’ll owe again. You think, why file for 2018 and bring the wrath of the tax authorities onto yourself?

But you know that not filing your 2018 tax return (and any prior unfiled ones) only delays the inevitable. Because of the advantages listed in our last blog post and in the above two sections, Chapter 13 may well be the tool you need.

You’re in a vicious cycle in which you may well be falling further behind instead of getting ahead.

Chapter 13 can likely enable you to break out of that cycle. Not only do you deal with all of your taxes and other debts in a single package. Not only to you often not have to pay all of your taxes. The vicious cycle is broken because your Chapter 13 budget will also address your 2019 and future income tax situation. It does so because your new budget will include enough withholding or quarterly estimated payments so you can stay current for 2019 and thereafter. Again, you should end the Chapter 13 plan being completely tax-debt free.

 

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.

 

Filing Chapter 13 in 2019 to Write Off More Income Taxes

January 14th, 2019 at 8:00 am

Chapter 13 is a riskier, longer, and maybe more expensive way to escape a dischargeable income tax debt—but may still be your best option. 


Last week we showed how to permanently write off (“discharge”) more of your tax debts through Chapter 7 “straight bankruptcy.” Today we show how to do this with Chapter 13 “adjustment of debts.”

Why Use Chapter 13 If Chapter 7 is Faster and Cleaner?

Chapter 7 is a very fast way to discharge an income tax debt that qualifies for discharge. You would very likely no longer owe the tax only about 4 months after filing a Chapter 7 case.

But Chapter 13 case could be much better for you than Chapter 7 for other reasons. Those other reasons may outweigh the benefit of discharging your dischargeable tax debt quickly.

You may owe some other income tax debt(s) which do not meet the conditions for discharge. These other taxes that may be too large to pay off reasonably through a monthly payment plan with the IRS/state.  The other taxes may not qualify for an Offer in Compromise or other settlement. You may well save money and avoid significant risks by handling all of your taxes in a Chapter 13 case.

There are also many other reasons that Chapter 13 would be worthwhile for you, reasons not involving income taxes. It may save your home from foreclosure or your vehicle(s) from repossession. Chapter 13 can deal with a child or spousal support arrearage much better than Chapter 7. There are many other situations where Chapter 13 gives you extraordinary and unique powers. So it can be worthwhile overall in spite of its disadvantages in dealing with a dischargeable tax debt.

How Does Chapter 13 Deal with Dischargeable Income Taxes?

Determining whether a particular income tax debt can be discharged in Chapter 13 is the same as in Chapter 7. Please see our last blog post for the conditions of discharge. These conditions mostly involve how long it’s been since the tax return for the tax at issue was due and when the return was actually submitted to the IRS/state. Sometimes there are other pertinent conditions, but usually it’s just a matter of timing.

Because of how the timing works, there are certain points of time in 2019 when a tax that hadn’t earlier qualified for discharge would then qualify. Again, see our last blog post about those crucial times happening this year.

If your tax does meet the conditions for discharge, it can get discharged in your Chapter 13 case. But this works quite differently than under Chapter 7.

One key difference is that under Chapter 13 there’s a good chance that you would pay something on your dischargeable tax debt.

Under Chapter 13 dischargeable income tax debts is treated like the rest of your “general unsecured” debts. Under your payment plan all such debts get paid the same percentage of their total amounts. That percentage may be any amount from 0% to 100% of their amount, depending on your budget and other factors.

Consider two situations: First, if you have a “0% plan” then you’d pay nothing on the dischargeable tax just like in a straightforward Chapter 7 case. Second, even if you do pay some percentage, often that actually doesn’t increase the amount you pay into your payment. We’ll explain these two situations.

A 0% Payment Plan

In some Chapter 13 cases all the money that the debtor can afford to pay goes to special creditors. All the money going into the Chapter 13 payment plan goes either to secured or to “priority” debts. These would include home mortgages, vehicle loans, nondischargeable taxes, child and spousal support, and such. These usually have to be paid in full before the “general unsecured” debts receive anything.  So during the 3-to-5-year payment plan no money goes to the dischargeable income taxes. That’s a 0% Chapter 13 plan.

Assuming the bankruptcy approves the plan, and you successfully complete it, at its conclusion the dischargeable taxes get discharged, without you having to pay any of it.

Payment Plans Which Do Not Increase the Amount You Pay

In many Chapter 13 plans the amount available for the pool of the “general unsecured” debts is a fixed amount. That amount is based on what you can afford to pay over the required length of the plan. (That required length is usually 3 or 5 years.) That fixed amount does not change regardless how much in “general unsecured” debts you owe. The amount just gets distributed to all those debts pro rata. The more you owe in “general unsecured” debts the lower the percent of the debts that fixed amount can pay.

For example, assume you can afford to pay the pool of “general unsecured” debts a total of $2,000 during the course of the payment plan. All the rest of the money you pay into the plan is earmarked for secured and “priority” debts. Assume also that you have $20,000 in unsecured credit card and medical debts and $5,000 of dischargeable income tax. Without the income tax, the $2,000 would be paid towards the $20,000 in “general unsecured” debts, resulting in a 10% plan. ($2,000 is 10% of $20,000.) Now when you add in the $5,000 tax, there’s a total of $25,000 of “general unsecured” debt. $2,000 is 8% of $25,000, resulting in an 8% plan.

You would be paying no more—the fixed amount of $2,000—over the length of your plan. The fact that you owe the $5,000 in dischargeable tax would not increase the amount you would pay. Then at the successful completion of the case all remaining “general unsecured” debts, including whatever was remaining on the dischargeable tax, would be forever discharged.

Conclusion

So you see that Chapter 13 is a slower and somewhat riskier way to discharge an income tax debt. Plus you may have to pay a portion of the tax instead of quickly discharging all of it under Chapter 7. But then again you may not have to pay anything on it, as described above. In any event, the delay and risks may well be worthwhile. Your bankruptcy lawyer will help you weigh all the advantages and disadvantages so that you can make the right choice.

 

Filing Bankruptcy in 2019 to Write Off More Income Taxes

January 7th, 2019 at 8:00 am

With smart timing you can discharge—legally and permanently write off—more income tax debts, even with a standard Chapter 7 case. 

 

The right timing of the filing of a bankruptcy case can make a tremendous difference. Our last 8 blog posts have all been about smart timing. If you need to use the bankruptcy laws to get relief from your creditors, it’s only sensible to get as much relief as the laws can give you by timing it right.

The discharge of income tax debts is particularly timing sensitive.

How Chapter 7 and Chapter 13 Conquer Income Tax Debts

Filing bankruptcy with smart timing in 2019 conquers your income tax debts in two main ways:

  • Discharge (legally write off) more of your tax debts (likely for the 2015 tax year). This applies to both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”
  • Include any taxes owed for the 2018 tax year in your Chapter 13 payment plan. This gives you huge advantages.

Today we’ll show the first part—how to discharge more income taxes in 2019 with a Chapter 7 case. We’ll cover the Chapter 13 aspects in the next two weeks.

Is Chapter 7 “Straight Bankruptcy” Good Enough?

You may be surprised that income tax debts can be discharged under Chapter 7 just like most other debts. They are discharged just as completely as a medical bill or credit card balance. You just need to time it right. You do also need to meet some other conditions. But much of the time those other conditions are met rather easily.

What’s the easiest way to deal with a tax debt?  You may have heard that the more complicated Chapter 13 is better if you owe income taxes. That’s often true, especially if you owe for multiple years and/or for more recent tax years.

However, under the following circumstances Chapter 7 is likely better:

  • All of the income taxes you owe qualify for discharge
  • Some but not all of your income taxes qualify for discharge, but you can handle the rest either through:

The main advantage with Chapter 7 is speed. An income tax that qualifies will be forever discharged. This will usually happen about 4 months after you file your Chapter 7 case. Your whole case will, in most situations, be fully completed at that point. You can get on with your life. In contrast, a Chapter 13 case usually takes at least 3 years and can stretch as long as 5.

Discharge More Income Tax under Chapter 7

There are two main timing conditions for discharging income taxes through Chapter 7. The day that your bankruptcy lawyer files the case must be both:

1) at least 3 years past when the applicable tax return was due, adding any time for extensions to submit the return (Section 507(a)(8)(A)(i) of the U.S. Bankruptcy Code.)

2) at least 2 years past when the tax return was actually submitted to the IRS or state tax agency (Section 523(a)(1) of the Bankruptcy Code.)

Again, there are other conditions. Some involve timing, such as additional time added if you’ve made an offer in compromise on that tax, or filed a prior bankruptcy. (Section 507(a)(8)(A)(ii).) The other main condition is if you “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” (Section 523(a)(1)(C).) A recorded tax lien on the tax would add some additional complications. But these additional conditions often don’t apply. If you ARE concerned that any might apply to you, tell your lawyer early in your first meeting.

Applied to Income Tax Owed for 2015

Let’s apply this to a tax debt for the 2015 tax year.

If you owe income taxes for 2015, when would you meet the first of the two main timing conditions? The 2015 tax return was due April 15, 2016. So you need to file your Chapter 7 case 3 years after that, after April 15, 2019. So then the required 3 years will have passed since that tax return was due.

This assumes you didn’t get a tax return filing extension. What happens if you did? That year the standard extension to October 15, 2016 fell on a Saturday. So the extended deadline would have actually been Monday, October 17, 2016. (As you can see, these kinds of minor-seeming details can be crucial.)  So if you got this extension you’d have to file your Chapter 7 case after October 17, 2019.

How about the second of the above two conditions? When did you submit your 2015 tax return(s) to the IRS/state? You have to make sure at least 2 years have passed since you’d submitted it/them. If submitted by either the regular due date of April 15, 2016 or the extended date of October 17, 2016, then you’ve already met this 2-year condition (as of the writing of this blog post). If you submitted the return(s) any later, you have to make sure that you meet this 2-year condition.

An Example

Assume that you:

  • owed $7,000 to the IRS for 2015 income taxes
  • submitted that tax return to the IRS on or before April 15, 2016 without an extension
  • did not pursue an Offer in Compromise or file an interim bankruptcy case, or if you did the resulting additional time has passed
  • the tax return was not fraudulent and you didn’t “willfully attempt” “to evade or defeat” the tax

If you now file a Chapter 7 case after April 15, 2019, this $7,000 tax debt would almost certainly be completely discharged within 4 months of filing. If you file before then this tax debt would not be discharged. See a competent bankruptcy lawyer as soon as possible to determine what’s best for you regardless.

 

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 13 AFTER the Recording of an Income Tax Lien

August 13th, 2018 at 7:00 am

Chapter 13 protects you from a recorded tax lien in crucial ways, and can reduce how much you pay on the underlying dischargeable tax debt. 

 

Last week’s blog post was about dealing with a recorded tax lien by filing a Chapter 7 “straight bankruptcy” case.  Usually the IRS’ or state’s recording of a tax lien against you effectively requires you to pay the underlying tax. That’s true even if that tax otherwise qualifies for total discharge—legal write-off in bankruptcy. That’s because a recorded tax lien converts that tax debt from being unsecured to being fully secured by your property and possessions. You pay the tax—sooner or later—to avoid losing what you own.

When Chapter 7 Might Help

Last week we outlined some circumstances in which Chapter 7 might satisfactorily deal with a recorded tax lien. Those circumstances were when the tax lien either failed to apply to any assets you own or the assets were worth much less than the tax debt at issue. For example, the IRS/state may record a lien on your home which in the process of getting foreclosed. If you’re letting the house go then that tax lien has no leverage over you. Your Chapter 7 case would discharge the income tax debt and the subsequent home foreclosure would undo the tax lien.

But these situations are quite rare. Usually a recorded tax lien (or more than one) covers everything you own. Usually the value of your assets encumbered by the lien(s) well exceeds the amount of the tax at issue. Or even if your assets’ value is less than the tax(es) owed, you don’t want to lose those assets. So you have no choice but to pay the tax owed. That’s true even if that tax otherwise qualified to be fully discharged.

However, if filing a Chapter 7 case takes care of all your other debts, maybe that’s okay. It would have been better to file before the tax lien’s recording so you could have just discharged the tax. But if it’s too late for that, clearing the deck of all or most of your other debts so you can concentrate on the tax debt afterwards may be your best option.

When Chapter 13 Could Be Much Better

The last paragraph assumes you could afford to pay the tax covered by the tax lien. But what if after finishing your Chapter 7 case you still didn’t have enough money each month? The protection from creditor collections (the “automatic stay”) you get from filing bankruptcy disappears when the case is over. That’s only about 3-4 months after your bankruptcy lawyer files your Chapter 7 case. With the tax lien putting your assets at risk you’d have tremendous pressure on you to pay the tax. So if you couldn’t afford to pay as fast as the IRS/state would demand you’d have a serious problem.

Filing a Chapter 13 “adjustment of debts” case could significantly help.

First, the automatic stay protection against the IRS/state usually lasts the 3 to 5 years that a Chapter 13 case takes to complete. That alone greatly reduces the constant tension of being at the mercy of the tax authorities. During the Chapter 13 case your assets that are encumbered by the lien are protected from seizure. And your income and other assets are protected from any other tax collection efforts.

Second, you usually have much more flexibility in your payoff of the underlying tax. You have much more control over the amount and timing of payments on the tax debt. Your monthly Chapter 13 plan payments are based on your realistic budget. In earmarking where the money from those payments goes you can often pay other even more urgent debts (such as catching up on a home mortgage or child suport) ahead of the tax debt. You can sometimes delay paying the tax until some future event, like the sale of your home or other asset.

When Chapter 13 Is Even Better

When the assets covered by the tax lien have no present value, Chapter 13 is particularly powerful.

Consider a tax lien on a home with no present equity beyond the prior liens. After a Chapter 7 case the IRS/state could just sit on that recorded tax lien until you built up equity in the home. You’d pay down the obligations and the property would rise in value until there was equity to cover the tax lien. The IRS/state would have huge leverage over you. But under Chapter 13 the bankruptcy judge would declare that there’s no present equity secured by the tax lien. The tax would effectively be unsecured—as if there was no tax lien. You’d lump that tax debt in with your general unsecured creditors. You would likely pay only a small portion of that tax debt. Often you would actually pay no more into your Chapter 13 payment plan as a result of that tax.

For example, assume you owed $10,000 in dischargeable income tax.  The IRS recently recorded a tax lien on your home for that tax. Your home is worth $250,000, has $5,000 in property taxes, $210,000 on a first mortgage and $40,000 on a second mortgage. Owing $255,000 you have no equity in the home. But as you pay down the property taxes and the mortgage, and assuming the property value increases, there’d soon be equity securing the tax lien. But Chapter 13 allows you to freeze the present equity situation. The tax lien presently does not cover any equity in your home, the tax debt is thus unsecured, and would be treated just like the rest of your unsecured debt. Adding the tax debt to your other unsecured debt would usually result in you paying no more than you would have otherwise.

 

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.

 

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