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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 Stops the Recording of an Income Tax Lien

July 23rd, 2018 at 7:00 am

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

 

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

Secured and Unsecured Debts in Bankruptcy

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

The Effect of a Tax Lien

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

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

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

Unsecured Older Income Tax Debts in Bankruptcy

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

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

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

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

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

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

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

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

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

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

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

The Lesson

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

 

The Surprising Benefits: Break a Tax Payment Plan through Chapter 13

June 11th, 2018 at 7:00 am

Use Chapter 7 to stop paying an unaffordable income tax payment plan when the tax owed is dischargeable. Use Chapter 13 when it’s not. 

Tax Agreement Payments Too High

We laid out the problem last week. You’d entered into a monthly payment plan with the IRS or your state because you couldn’t pay what you owed. But now you don’t have the money to make the payments. Or you’re in a payment plan but will owe more income taxes soon, putting you then in violation of your payment agreement.  

If you violate your tax agreement the IRS/state could then take aggressive collection action against you. Or you might be able to add an upcoming new income tax owed into your current tax payment agreement. But the increased monthly payment may well push you over the financial edge. But even if you think you could afford it, you’d be going backwards instead of making progress.

Chapter 7 Makes Sense When Your Tax Owed Can Be Discharged

If all, or most, of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d discharge (forever write off) all or most of the taxes you owe. You’d either owe no taxes or owe a small enough amount to be able to handle it with a new smaller payment plan.

But if you can’t discharge all your income taxes, or enough, through Chapter 7, Chapter 13 “adjustment of debts” is likely the better tool.

Chapter 13 Plan

A Chapter 13 payment plan wraps all or most of your debts into a single monthly payment. This payment includes any tax debts. This single Chapter 13 monthly plan payment is based on your actual budget. Some debts—such as taxes, and secured debts such as a home mortgage and vehicle loan—get prioritized. Usually you pay less on your other debts, often not much, sometimes nothing.

Advantages

Dealing with income tax debts with Chapter 13 gives you the following advantages over Chapter 7:

  • Income taxes that don’t qualify for discharge do need to be paid in full, but on a very flexible schedule. You and your bankruptcy lawyer create a new plan incorporating all of your debts. This plan focuses your resources on your most important debts, including nondischargeable income taxes.
  • Usually you don’t pay ongoing interest and penalties. This saves you potentially lots of money. That’s particularly true if tax interest rates will rise in the near future along with other interest rates.
  • Other even more important debts—such as child/spousal support, or unpaid mortgage or home mortgage payments—can often be paid ahead of income tax debts.  
  • The budget you enter into earmarks enough money to withhold from your paycheck or pay quarterly for the current year’s taxes. This enables you to break out of the endless cycle of being behind on your income taxes.
  • Chapter 13 handles income tax liens much better than Chapter 7. If there’s no equity supporting the lien, you can often get rid of the lien without paying anything for it. If the lien is partially secured, you will likely pay less to get rid of it than otherwise. Chapter 13 takes away much of the leverage of tax liens from the tax authorities.
  • You are protected throughout your entire 3-5-year Chapter 13 payment plan from tax collection. Bankruptcy stops all tax collection, including the recording of tax liens. In Chapter 7 this protection lasts only 3-4 months. Then you’re on your own dealing with any remaining tax debts. With Chapter 13 the protection lasts until the end of your Chapter 13 case. At that point you should owe absolutely no tax debt.

Conclusion

Filing bankruptcy allows you to unilaterally break your monthly payment agreement with the IRS and/or state. With Chapter 7 you may be able to discharge all or most of your tax debts. Or, discharging all or most of your other debts may make it possible to stay in your tax payment plan, if that’s your only significant debt. However, if Chapter 7 doesn’t help you enough, Chapter 13 gives you many other significant advantages (some listed above). Talk with an experienced local bankruptcy lawyer to figure out which is better for you.

 

The Surprising Benefits: Break a Tax Payment Plan through Chapter 7

June 4th, 2018 at 7:00 am

Can’t afford your current IRS/state monthly payment plan? Have an upcoming additional new year of taxes to pay? Chapter 7 can often help.

Tax Installment Agreement You Can’t Afford

It’s a common problem. You owed income taxes a year or two ago when you sent in your tax returns. Money was very tight so you couldn’t just pay it off. You found out that the IRS let you pay that unpaid tax through a monthly installment plan. If you also owed state income taxes, you likely found out that your state taxing authority lets you do this, too.

So you set up the payment plan with the IRS and/or state. But your financial situation only got tighter because now you had a new monthly obligation you absolutely had to pay.  So now you are struggling to pay the monthly tax payment along with your living expenses and other debts. You wish there was a way to get out of your IRS/state monthly tax payment and other debts.

Tax Installment Agreement You Are About to Break

If you were desperate to have the money to pay the monthly tax payment (along with your other obligations), you may have arranged to withhold less from your paycheck during the current year. Or if you’re self-employed you may not have paid enough estimated quarterly taxes.

If so, you’ll likely owe income taxes again when your next tax returns are due. Assuming you couldn’t then immediately pay this new tax owed, this would likely be considered a breach of your current payment plan with the IRS/state.

At that point the IRS/state could terminate the monthly payment agreement. It could then take aggressive collection action against you, something you really want to avoid.

Or instead the IRS/state might let you roll the new tax owed into your current installment agreement. But that would likely result in an increased monthly payment. This only aggravates your problem of having more debt than you can handle.

Even if you could afford to pay an increased monthly tax installment payment, you’d be going backwards instead of making progress. The tax interest and penalties would add significantly to the amount you have to pay. You’re in vicious cycle and don’t see a way out of it.

Two Ways Out

But there ARE potentially two ways out: Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” We’ll cover Chapter 7 today; Chapter 13 next week.

Chapter 7 Discharge of Tax Debts

Which Chapter is better depends on many factors, but especially on whether your older income tax debts are “dischargeable.” This means whether the taxes can be legally, permanently written off in bankruptcy.

Some income taxes CAN be discharged. Basically, certain amounts of time must pass since the time the tax return for the tax was legally required to be submitted, and since the tax return was actually submitted. If you meet those conditions (and some other possibly relevant ones), the tax debt is dischargeable just like any ordinary debt.

When Chapter 7 Makes Sense

If ALL the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d not have to pay anything anymore on that monthly payment plan. If you anticipate owing new taxes with your next tax return(s), you could likely enter into a fresh monthly payment plan for these taxes. You wouldn’t end up breaching your present payment plan because you would no longer owe anything on it.

If SOME of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 may also make sense. You would no longer have to pay that part of your taxes, which would presumably reduce your monthly tax payments. If that reduced amount is one that you could afford—especially after discharging all or most of your other debts—Chapter 7 would help enough to justify using this tool.

If Chapter 7 Isn’t Good Enough

If you can’t discharge all your income taxes, or enough, through Chapter 7, consider Chapter 13 “adjustment of debts.” We’ll explain in our blog post next week.

 

Stop IRS Garnishment to Start Installment Payment Plan

January 29th, 2018 at 8:00 am

Filing Chapter 7 bankruptcy stops an IRS/state garnishment and other collection activities, even if it’s for a tax you still have to pay. 

 

We ended the last blog post saying that sometimes a Chapter 7 bankruptcy will stop a wage garnishment only temporarily. One such situation is if the IRS (or state tax agency) is chasing you on a debt you can’t discharge.

An Income Tax Debt You Can’t Discharge

You can’t discharge (legally write off) the tax debt usually because it’s not old enough. If you owe such a tax debt, and your paycheck (or bank account) is being garnished, filing a Chapter 7 case will only stop the garnishment for the length of time your case is active—usually about 3-4 months. The protection from collection called the “automatic stay” ends when you receive a discharge of your debts. (See Section 362(c)(2)(C) of the U.S. Bankruptcy Code.)

The 3-4 Month Break in Collections Can Be Enough

For practical reasons the temporary nature of the protection is often not a problem. You could get much longer and better protection against the IRS and state on a debt you can’t discharge than you would under Chapter 7.  You could do this by filing a Chapter 13 “adjustment of debts” instead. That would give you 3 to 5 years to pay a tax debt that you can’t discharge. Plus Chapter 13 gives you other benefits, such as usually income tax debts stop accruing further interest and penalties. But Chapter 13 also has disadvantages, including that it takes so much longer to complete.

So you would deal with a nondischargeable tax debt through Chapter 7 instead of Chapter 13 for a simple reason. You’ve decided that you could afford to pay that tax debt through monthly payments once you discharged all or most of your other debts. You’ve carefully reviewed your itemized budget with your bankruptcy lawyer. You know which, if any, other debts you will continue to owe. You know which debts will be discharged. From this you’d determine how much you could start paying the IRS/state every month. Your lawyer should be able to tell you whether that would be enough to keep your tax creditor happy.

Mission Accomplished

Assuming you could afford the required monthly payment, you file a Chapter 7 case instead of a Chapter 13 one. Then, within a few weeks after filing you or your lawyer contacts the IRS/state to make monthly payment arrangements. Those monthly installment payments could start either before the completion of your Chapter 7 case or immediately thereafter. As part of the arrangements the IRS/state would agree not to garnish your paychecks (or take most other collection actions) as long as you make the agreed payments until you paid the tax (plus interest and penalties) in full.

Conclusion

The fact that Chapter 7 stops collection of non-dischargeable taxes only temporarily is not a problem as long as you are confident that you qualify for and can afford to pay the monthly payments the IRS/state will require.

 

A Chapter 7 “Means Test” Calculation Adjustment

March 7th, 2016 at 8:00 am

As of April 1, 2016 you can have a little more “disposable income” and still pass the “means test” to qualify for Chapter 7 bankruptcy.

 

Means Test

The “means test” determines whether you have enough income after your expenses (that is, enough “disposable income”) to repay your creditors a certain amount. If you don’t have enough disposable income, then you qualify for Chapter 7“straight bankruptcy.” Otherwise you must instead deal with your debts through a Chapter 13 “adjustment of debts” case.

Chapter 7 allows you to discharge (legally write off) all eligible debts in a process taking 4 months or so. In contrast Chapter 13 requires you to pay debts as much as you can afford to in a payment plan lasting usually 3 to 5 years. Chapter 13 may give you some significant advantages over Chapter 7. But in many other situations being able to discharge debts in a matter of a few months makes Chapter 7 the much preferred option.

Exempt from the Means Test

You don’t have to take the means test to qualify for Chapter 7 under two sets of circumstances:

  • if your debts are primarily business debts instead of consumer debts
  • if you fall into one of several military service categories

(We’ll cover these exemptions from the means test in the next couple blog posts.)

The Easy Part of the Means Test

Assuming you don’t qualify for an exemption and have to take the means test, it consists of a number of parts. If you pass the first part, then you pass the entire means test and qualify for Chapter 7. You don’t have to go through the remaining parts. Many people who pass the means test do so this way.

This first part determines whether your income is low enough. It’s low enough if it’s no more than what is called the “median income” amount for your family size and your state.

Calculating your “income” for this purpose is different than you’d think. It’s based on a very broad meaning of “income,” money from almost all sources. This “income” is calculated from money received not in the prior tax year but rather precisely during the 6 full calendar months before the bankruptcy case filing. Then that “income” is compared to published median income amounts for your family size and state of residence.

The rest of this blog post assumes that your income is greater than the applicable median income amount. That’s because we’re focusing now on the parts of the means test that require going beyond this initial “income” part.

Calculating Your Allowed Expenses

If you aren’t exempt from the means test and your income is above the state median for your family size, the next step is to subtract your living expenses from your income.

For many expense categories you don’t use your actual expenses. Instead you use IRS National Standards for expenses such as food, clothing, and health care. For expenses such as housing, utilities, and vehicle operation, you use IRS Local Standards. These National and Local Standards can be found here.

For your remaining expense categories—for example, mortgage and vehicle loan payments, childcare, court-ordered payments, life insurance, involuntary payroll deductions, ongoing charitable contributions, and taxes—you can use the average amounts you actually are paying.

Too Much Disposable Income?

If your allowed expenses are more than your income, then you pass the means test.

If your income is more than your allowed expenses then whether or not you pass the means depends on some remaining steps.

Subtract the expenses from the income to get your disposable income. Multiply that amount by 60. If that amount is less than $7,700, you pass the means test. You are considered to not have enough disposable income to be able to pay a meaningful amount to your creditors.

For example, if your monthly disposable income is $100, that amount multiplied by 60 equals $6,000. Since that is less than $7,700, you’d pass the means test.

But if your disposable income multiplied by 60 results in an amount more than $12,850, you don’t pass the means test.

For example, if your monthly disposable income is $250, that amount multiplied by 60 equals $15,000. Since that is more than $12,850, you’d not pass the means test.

And if your disposable income multiplied by 60 results in an amount between $7,700 and $12,850, then compare that amount to 25% of your total unsecured debts. If the amount is less than this 25% amount, then you pass the means test. You are considered to have insufficient disposable income to pay a meaningful amount to your creditors.

If the amount is 25% or more than your total unsecured debts, you’d not pass the means test.

For example, if your monthly disposable income is $175, that amount multiplied by 60 equals $10,500, an amount more than $7,700 and less than $12,850. If you had $50,000 in unsecured debts, 25% of that would be $12,500. Since $10,500 is less than $12,500, you would pass the means test.

The Increases of April 1

The $7,700 and $12,850 amounts just used are correct for Chapter 7 cases filed on or after April 1, 2016. Before that these amounts are $7,475 and $12,475. The increases are part of an every-3-year cost of living adjustment. This means that as of April 1 you can have slightly more disposable income and still qualify for Chapter 7.

Final Note—“Special Circumstances”

If your disposable income is too high after the calculations above, you still might be able to claim “special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.”

 

Bankruptcy Timing: Include Income Taxes Owed for 2015 by Filing Chapter 13 in Early 2016

January 6th, 2016 at 2:00 am

As of January 1, 2016 you can include any taxes you owe for the 2015 tax year in your Chapter 13 payment plan.

 

If you’ve been thinking about filing bankruptcy, and expect to owe income taxes for 2015, you have an extra reason to file a Chapter 13 “adjustment of debts” now that we’re in the new year. That’s because now that 2016 has begun you can include income taxes owed for the 2015 tax year in your new Chapter 13 case and payment plan. Being able to include taxes owed for 2015 gives you significant advantages.

It saves you money, gives you crucial flexibility, and stops future tax liens and other tax collections.

Saves You Money

Including what you owe in income taxes for 2015 in a Chapter 13 payment plan saves you money because almost always you don’t have to pay any additional interest and penalties on the tax owed. The savings can be huge.

That’s particularly true if you have other debts that you want or need to be paid ahead of the 2015 tax. That would delay payment of the taxes owed for 2015. As a result the savings from not paying any accruing interest and penalties would be that much greater.

Under Chapter 13 you would have to pay the tax itself owed for 2015 as a “priority” debt. But you would have the entire length of your 3-to-5-year court-approved payment plan to do so. No interest or penalties on the tax would accrue during this entire time as long as you pay your plan payments as agreed and thereby complete the case successfully.

Gives You Flexibility

Including your 2015 taxes in your Chapter 13 payment plan gives you tremendous flexibility in the payment of that tax. That’s crucial when you have other debts that need to be paid, and need to be paid more urgently. These can include:

  • Home mortgage arrearage to prevent your home from being foreclosed
  • Unpaid home real estate taxes, which could also put your home in jeopardy and usually carry a high interest rate
  • Vehicle loan arrearage or the monthly payments themselves needed to keep your vehicle
  • Child or spousal support arrearage, to prevent garnishment and the loss of your driver’s and other licenses
  • Prior income taxes with recorded liens, to protect the home or other possessions encumbered by the attached liens

Besides the flexibility to pay other creditors ahead of the 2015 taxes, Chapter 13 also can let you change the amount of your monthly play payment (a single payment that covers all your creditors) to adjust to changes in your income and expenses.

Stops Future Tax Liens and Other Tax Collections

Including your 2015 income tax debt in a Chapter 13 plan stops the IRS and/or state from taking virtually any collection actions on the 2015 tax debt throughout the years of the Chapter 13 case. This lack of collection pressure allows you to take so long to pay this tax.

Preventing future tax liens from being recorded on the 2015 taxes is especially helpful. Tax liens are dangerous because they give the IRS/state a great amount of leverage, and put your assets at risk. Chapter 13 allows you to avoid the recording of tax liens while paying off the tax at your pace, a significant advantage.

Practical Situations This Is Very Helpful:

Being able to include 2015 income taxes in a Chapter 13 payment plan is especially helpful if you owe taxes for prior years and if you need to file a Chapter 13 case for other reasons.

1) Owe Other Income Taxes

If you owe for the 2015 tax year plus a prior year or more, you may well be in a vicious cycle. You may simply not be making enough money to pay your monthly debt payments, have enough for reasonable living expenses, while paying enough in income tax withholdings or quarterly estimated payments to keep up on current taxes. So you’re either making no headway or slipping further and further behind.

You may even be in a monthly installment plan with the IRS and/or state for prior unpaid income taxes. But as a result you can’t afford to pay enough ongoing tax withholdings or quarterly payments because of what you have to pay towards the installment plan. And you know that it’s a violation of that installment agreement to not stay current on subsequent tax years, so you’re afraid of what’s going to happen when the IRS/state finds out that you owe for 2015.

This vicious cycle is broken by filing a Chapter 13 case, and particularly doing so early in 2016. That’s because now the 2015 tax year can be incorporated into your Chapter 13 payment plan, giving you the savings and flexibility and other benefits summarized above for the taxes owed both for 2015 and for the prior tax year(s). Your new budget will include enough withholding or quarterly payments so you can stay current for 2016 and future years. You may not need to pay older income taxes at all or only a small percentage of them, and will likely not need to pay any ongoing interest and penalties on any of the taxes. And you’d end the Chapter 13 plan being completely tax-debt free.

2) Need Chapter 13 for Other Reasons

If you owe income taxes for the 2015 tax year only, and the amount is not very large, a Chapter 7 “straight bankruptcy” may discharge enough other debts so that afterwards you could afford to pay off the taxes through reasonable monthly installment payments acceptable to the IRS/state.

But that’s if you don’t have some other good reason to be in a Chapter 13 case. You may have debts that you would continue either owing or being behind on if you filed a Chapter 7 case, which would be better handled under Chapter 13. Examples are child/spousal support and home mortgage arrearages. You may need some of the specialized tools available only under Chapter 13, such as stripping a second mortgage from your home’s title, a “cramdown” on a vehicle loan, or preserving an asset that is not otherwise exempt from turnover to the bankruptcy trustee. In these and various other situations it’s helpful that the 2015 income tax debt can be incorporated into a Chapter 13 payment plan.

This way you will be protected from all of your creditors as you deal with them all without leaving any loose ends to cause problems later.

 

Chapter 7 and Chapter 13–An Income Tax Lien Secured by Equity in Your Home

November 18th, 2015 at 8:00 am

If you have enough equity in your home to cover a recorded tax lien, to keep your home you must pay that tax. Here’s how bankruptcy helps.

 

Our last blog post laid out the options if a tax lien was recorded against your home but there WASN’T equity in the home to cover that tax lien. Today’s blog post is about dealing with an income tax lien recorded against a home which DOES have enough equity to cover the full amount of the income tax owed on that lien.

Let’s make this clearer with an example. Assume your home is worth about $20,000 more than you owe against on your mortgage(s). Imagine that you owe $6,000 in income taxes to the IRS for the 2011 tax year that you’d been struggling to pay when the IRS recorded a tax lien on your home a few months ago on that tax. The equity in your home is larger than the amount of that tax lien, so the entire $6,000 tax is now secured by your home.

What are your options for dealing with this tax?

Dischargeable Tax or Not?

In our last blog post we explained how there are two big considerations for determining your options here. First, whether there’s equity to cover the tax lien, and second, whether the underlying income tax is one that can be discharged—legally written off—in bankruptcy.

Today let’s again look at the scenario in which the income tax meets the conditions for discharge. So continuing with the above example of the $6,000 tax owed for 2011, assume that you filed the tax return for that tax by the usual April 2012 deadline. This means the $6,000 tax would very likely now be dischargeable in bankruptcy. That’s because it meets the two main necessary conditions: more than 3 years have passed since that tax return was due (April 2012) and more than 2 years since that tax return was actually filed (the same date).

Without the recorded tax lien, this $6,000 tax could be discharged in either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” Under Chapter 7 you’d likely not have to pay ANYTHING on that tax before it would be discharged forever. Under Chapter 13 you’d likely not have to pay ANYTHING MORE than you’d pay otherwise to all of your creditors if you hadn’t owed the tax.

But the recorded tax lien, securing that debt with the equity in your home, changes everything.

Without Any Bankruptcy

A recorded tax lien gives tremendous leverage to the IRS or state taxing authority. It makes your tax debt a matter of public record. It directly and seriously hurts your credit record. A tax lien requires you to pay the underlying tax—plus interest, penalties, and costs—in full if you sell or refinance your home. And the lien can even jeopardize your ability to sell or refinance your home at all. Under some circumstances the IRS/state may even foreclose on its tax lien.

So a tax lien gives you a much incentive to pay off the IRS/state lien. But most likely you can’t. You’ve wanted to take care of that tax debt but just haven’t had the money to do so. You may even entered into a payment plan with the IRS/state and not been able to keep it up. Or you simply have not had the money to begin making payments to them. Either way you need help.

How Chapter 7 Can Help

“Straight bankruptcy” can help in two ways.

First, the main benefit of filing a Chapter 7 case is that it can discharge all or most of your other debts—perhaps even some other years’ income taxes—so that you can focus your financial attention on the income tax debt with the lien on your home.

The IRS and state taxing authorities will often agree to take no further action on a tax lien if you enter into and comply with a monthly payment plan with them. So your Chapter 7 case could take away most of your other financial pressures so that you could focus on taking care of the tax debt and lien in a feasible way.

Second, if you decided to sell your home or walk away from it, Chapter 7 would help by discharging the income tax with the tax lien on it, so you’d not owe anything more on that tax. If you sold your home but it didn’t sell for enough to pay off the tax, or if you surrendered the home and the IRS/state got nothing from the mortgage holder’s foreclosure of the home, outside of bankruptcy you’d owe whatever tax debt would remain. But assuming that the tax qualified for discharge (as in the $6,000 example we’ve been using), you would not owe any of that tax after the Chapter 7 case was completed and the home was gone

How Chapter 13 Can Help More

But assuming you want to keep your home, entering into a payment plan with the IRS/state to satisfy the tax lien after completing a Chapter 7 case doesn’t always work.

Even after discharging your debts through Chapter 7, you may not qualify for or be able to afford to pay what the IRS/state requires in a payment plan.

You may have other crucial debts to pay that Chapter 7 does not help with, debts that would compete with what you’d otherwise be able to pay to satisfy the tax lien. If you want to keep the home, you may need to catch up on its property taxes, mortgage(s), or a homeowner’s association assessment. To keep your vehicle, you may need to catch up on its payments. Or you may need to quickly catch up on your child or spousal support to stop paycheck garnishments or the suspension of your driver’s license.

You may need the benefits that only Chapter 13 provides. These include “stripping” a second or third mortgage so that you could avoid making those payments and get closer to having equity on your home. Or you may need to catch up on child or spousal support and protect yourself and your income and assets from your ex-spouse or the support enforcement people while you do so. You may need to save money on your vehicle loan through a “cramdown,” reducing both monthly payments and on your total vehicle debt. Or you may need to discharge non-support obligations to your ex-spouse, or to keep student loan payments on hold for a few years.

How Chapter 13 Helps with the Tax Lien

Besides giving you unique tools such as the mortgage “strip,” stopping collection of support arrearage, vehicle loan cramdown, and others that Chapter 7 can’t provide, Chapter 13 deals with and protects you from the tax lien itself.

First, it stops the IRS/state from enforcing the tax lien through foreclosure of the lien or any other heavy-handed collection tactics. When you enter into a payment plan with the IRS/state after a Chapter 7 is over, you have no further bankruptcy protection. In contrast, that protection continues throughout the 3-to-5-year Chapter 13 payment plan.

Second, your payments on the underlying tax can be delayed or reduced while you pay other even more time-pressing debts, such as support arrearage or home mortgage or vehicle arrearage. The IRS/state doesn’t have grounds for objection as long as the tax secured by the tax lien is being paid before your case is finished.

Third, if your financial circumstances change, you can usually adjust your Chapter 13 plan payments and the payments being paid to the IRS/state on the income tax debt to account for those changes. Instead of being at the mercy of the IRS/state and their largely arbitrary rules, you would likely have more flexibility and protection within the bankruptcy procedures.

Finally, if your personal circumstances change or the value of your home increases or decreases so that instead of staying in your home you decide instead to sell or surrender it, you can usually change your Chapter 13 plan to incorporate those changes in dealing with the tax and tax lien in a way most favorable to you. You also have an almost universal right at any point to either dismiss (get out of) your Chapter 13 case altogether or to convert it into a Chapter 7 one.

Assuming that you wanted to keep your home, and you completed your Chapter 13 plan either as originally approved or as amended later, at its completion the tax debt with the tax lien would be paid in full and the IRS/state would release the tax lien.

 

Chapter 7 and Chapter 13–An Income Tax Lien on Your Home

November 16th, 2015 at 8:00 am

Which kind of bankruptcy to file depends on whether there is equity for the lien and whether the underlying tax can be discharged.

 

If you’ve had an income tax lien recorded on your home, there are two big considerations about how that tax and that lien will be handled in a bankruptcy. These two considerations will also affect whether you would want to file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” to deal with that tax and lien.

Equity to Cover the Tax Lien

First, there can be a world of a difference whether your home has enough equity—value beyond any property tax, mortgage(s), and perhaps other prior other liens—so that the tax lien attaches to present value in your home. Under certain circumstances this can make the difference between having to pay that tax in full and not needing to pay any of it.

That’s because when there is equity in your home to cover the income tax debt, that turns an unsecured debt into a secured one, secured by your home. That’s a little like the difference between an unsecured promissory note and one mortgaged against your home. If you want to keep your home you have to deal with that debt and can’t just write it off in bankruptcy.

Dischargeable Tax or Not

The second consideration for how an income tax with a tax lien on your home is handled is whether the tax on which the lien was recorded can be discharged—legally written off—in bankruptcy. If that underlying tax meets the conditions for discharge you may not need to pay the tax in spite of the tax lien.

(See our last blog post for the conditions an income tax debt must meet for it to be discharged in bankruptcy.)

A Tax Lien with No Equity on a Dischargeable Tax

For the rest of today’s blog post imagine the following scenario. Assume your home is worth about as much as you owe in property taxes and your mortgage (or two). So it has no equity securing the IRS tax lien recorded a few months ago on the $6,000 income tax you owe for the 2011 tax year. Assume also that you filed the tax return for that 2011 income tax at the usual April 2012 deadline. That means that this tax is now dischargeable in bankruptcy since it’s been more than 3 years since that tax return was due (April 2012) and more than 2 years since that tax return was actually filed (the same date).

Treatment under Chapter 7

In a Chapter 7 “straight bankruptcy,” if the IRS had NOT recorded its tax lien before the case was filed, the $6,000 income tax debt would simply be discharged, usually within about 4 months after the bankruptcy filing. You’d never owe that tax again.

Furthermore, once you filed that Chapter 7 case, doing so would immediately prevent the IRS from recording a tax lien on your home. Then after the discharge of debts was entered by the bankruptcy court and the tax debt was gone, the IRS could not record a lien on that discharged debt.

But if the tax lien is recorded before the Chapter 7 case is filed the situation is completely different.

The tax lien survives the bankruptcy, similar to a vehicle lender’s lien on your vehicle continuing in spite of a bankruptcy. In the case of the vehicle lien you have a choice of paying off the debt and thereby getting a release of the lender’s lien, or surrendering the vehicle and then not having to pay the discharged debt.

With the tax lien, the underlying debt may be discharged but the lien on your house survives. Under certain limited circumstances the IRS might release its lien, eventually, such as if the home was worth much less than the debts ahead of the IRS and so there was no hope that there would ever be any equity for the IRS. Or the lien would just expire at some point.

But that’s not likely in our scenario where the prior liens on the home are close to the value of the home. That means that any upcoming increase in the home’s value, together with your progress in paying down the property taxes and mortgage(s), would build equity for the tax lien to attach to. The IRS could just sit on its lien until you sell or refinance the home, releasing its lien only when it’s paid in full (including all the interest and penalties that have accrued in the meantime), or perhaps at some negotiated reduced amount if there isn’t enough equity.

Note the contrast between this scenario vs. just discharging the debt if there was no recorded tax lien.

Treatment under Chapter 13

Chapter 13 “adjustment of debts” can do better with the tax lien under these facts.

In contrast to Chapter 7, the Chapter 13 has a valuable legal mechanism that would affirmatively require the IRS to release the tax lien if you can show that it does not attach to any equity in the home.

Under Chapter 13 you and your attorney propose a formal payment plan, the IRS has the opportunity to object to its terms, any objections are negotiated or resolved by the bankruptcy judge, and then the plan is approved by the judge. Within that procedure the $6,000 tax debt would be determined to have no equity securing it (assuming that can be established with evidence of the home’s value and the amounts of the prior liens), and thus would be an unsecured debt.

The tax debt would thus be lumped in with and treated like your other “general unsecured” debts. That is, that $6,000 would be paid only as much as you could afford to pay it during the life of your 3-to-5-year Chapter 13 plan. Often that would be little or nothing because you are allowed—indeed often required—to first pay other legally more important debts. These other debts can include secured ones like a home mortgage arrearage or vehicle loan payments. And they can include “priority” debts like more recent income taxes that can’t be discharged.

Furthermore, even if you do pay some percentage of your “general unsecured” debts adding that $6,000 tax debt to that “general unsecured” pool usually doesn’t increase what you pay. That’s because most of the time you pay a fixed amount of that pool of debts, so that adding the tax debt to that pool simply reduces what the other creditors receive without you paying any more.

At the end of the Chapter 13 case, with usually little (and sometimes nothing) having been paid on that $6,000 debt, any portion that hasn’t been paid is forever discharged, and the IRS releases its tax lien. You are then tax-debt free, and your home is tax lien-free.

Conclusion

In this scenario, with prior liens totaling close to the value of your home, and with the income tax being a dischargeable one, Chapter 13 is the safer way to go. Unlike Chapter 7 it doesn’t leave you at the mercy of the IRS taking advantage of future equity in your home. And—depending on your income and what other important debts you have to pay—Chapter 13 would likely enable you to pay less on that tax, often much less.

 

Internal Revenue Service Issues: Tax Levies vs. Tax Liens Part One

August 13th, 2014 at 8:35 am

tax lienIt is not uncommon for a person to find themselves behind on their income taxes, and many across Texas and the rest of the country suffer from this same problem. Everyone has seen the proverbial person walking through the door of his or her accountant’s office with years worth of paperwork in hand. However, this only generally occurs when they receive notices from the Internal Revenue Service or simply have all of their money frozen.

In many cases, filing for bankruptcy can assist you in your financial predicament with the government. First, you should consult a Texas bankruptcy attorney to assess what is really going on and to find the best way to remedy the problem. In this way, it is critical to understand the key differences between a tax levy and a tax lien.

Consider the following deviations between a tax levy and a lien, and why one is more critical than the other to your short and long term financial health:

  • The IRS is not seizing your property when a lien is imposed: A tax lien only secures the governments interest in your property should your debt become a liability. This does not mean it is not a big deal, however; all levies are reported to all creditors, and becomes public on your credit scores, making it much more difficult to obtain a loan;
  • Tax liens can turn serious very quickly: While your property is not seized during a lien, a levy works completely differently. In this case, the government is, in fact, taking your property to settle a passed debt–often the result of a grossly overdue lien.
  • Almost nothing is safe during a levy: If you are subject to a tax levy by the IRS, they can seize almost any asset you own to repay the debt. This includes your home, car, wages, and even bank and retirement accounts. This extends to accounts that are in someone else’s name as well; including things such as life insurance and joint accounts.

If you have received a notice from the Internal Revenue Service regarding unpaid income taxes of your own, it is imperative that you act as soon as possible. A professional and experienced Texas bankruptcy attorney can assist you by presenting you with all the information, and advising you how to move from there.

Contact The Law Offices of Chance M. McGhee today for a free consultation and personal legal assistance from a San Antonio bankruptcy attorney on how to move forward in your IRS tax situation for the best possible outcome.

Call today for a FREE Consultation

210-342-3400

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