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Dealing With Tax Liens in Chapter 13

Tax Liens in Chapter 13

The filing of an IRS Tax Lien or NYS Tax Warrant (hereafter collectively referred to as a “Tax Lien”) creates a lien in favor of the government  against of your all real and personal property (hereafter collectively referred to as the  “Encumbered Property”), including any real estate you own in the county where the Tax Lien is recorded.  This Tax Lien is essentially a forced legal claim secured by all of your Encumbered Property up to the dollar amount set forth in the Tax Lien.  To sell or refinance any of your Encumbered Property (usually real estate) you must pay off the government the amount set forth in the Tax Lien.

As disastrous as this may sound (and sometimes is), in many instances a Tax Lien can be favorably dealt with in a Chapter 13 Bankruptcy.

Secured & Unsecured Claims

When the government files a Proof of Claim in your Chapter 13 case they will assert the entire amount of their Tax Lien to be a Secured Claim, and since Secured Claims have to be paid in full in Chapter 13, this can be fatal to many Chapter 13 Plans.  However,  a fundamental tenet of Chapter 13 is that in many instances Secured Claims can be bifurcated, which results in the allowed value of a  Secured Claim being limited to the value of the equity in your Encumbered Property (also referred to as “Cram Down”).  Accordingly, if the asserted amount of the government’s Secured Claim exceeds the value of the equity in your Encumbered Property, the difference (sometimes referred to as a deficiency) is reclassified to either an Unsecured Tax Claim or to a Priority Tax Claim, depending upon whether or not the tax year in question had a return that was due more than three years prior to the bankruptcy filing. This distinction is important because Priority Tax Claims (i.e., less than 3 years old) have to be paid in full in Chapter 13  but Unsecured Tax Claims (more than 3 years old) do not.  The following examples can illustrate this point:

Example #1:  The debtor files a Chapter 13 on May 1, 2019 proposing a Plan with a 60 month repayment term.  The IRS files a Secured Claim in said case for  $120,000.00 based upon a Tax Lien covering calendar  years 2012 thru 2015, so there are no Priority Tax years in question.  Your credit card and other non-mortgage debt totals $39,000.00.  In this Example the following assumptions apply:  your tax returns filed for 2012 thru 2015 were timely filed, not fraudulently filed and were otherwise dischargeable; you own a house worth $200,000.00 that is subject to a $195,000.00 mortgage (that you are current on), leaving equity of $5,000.00, you own a car that has equity of $1,000.00, and the equity in your other assets amounts to $3,000.00—the total equity in all Encumbered Property amounts to $9,000.00.  In Chapter 13, the Secured Claim could be bifurcated  into an allowed Secured Claim of $9,000.00, which would have to be paid in full, and an Unsecured Claim of $111,000.00, which would not require full payment. When coupled with the other credit card / non-mortgage debt the allowed Unsecured Claim would total $150,000.00, which would not have to be paid in full.  Accordingly, a Plan that pays $170.00 per month for 60 months would be accepted by the Court and would result in the Secured Claim being paid in full and the Unsecured Claims receiving at least something, albeit a fraction of what they are owed.

Example #2:  The debtor files a Chapter 13 on May 1, 2019 proposing a Plan with a 60 month repayment term.  The IRS files a Secured Claim in said case for  $120,000.00 based upon a Tax Lien covering calendar  years 2013 thru 2016, with 2016 being a Priority Tax year.   Your credit card and other non-mortgage debt totals $39,000.00.  In this example the following assumptions apply:  your tax returns filed for 2013 thru 2016 were timely filed and not fraudulent, and $30,000.00 is owed for each of the four covered years;  you own a house worth $200,000.00 that is subject to a $195,000.00 mortgage (that you are current on), leaving equity of $5,000.00, you own  a car that has equity of $1,000.00, and the equity in your other assets amounts to $3,000.00—the total equity in all Encumbered Property amounts to $9,000.00.  In Chapter 13 the Secured Claim could be bifurcated  into an allowed Secured Claim of $9,000.00 and a Priority Tax Claim of $30,000.00, both of  which would have to be paid in full, and an Unsecured Claim of $81,000.00 of  that would not require full payment.  When coupled with the other credit card / non-mortgage debt the allowed Unsecured Claim would total $120,000.00, which would not have to be paid in full.  Accordingly, a Plan that pays $725.00 per month for 60 months would be accepted  by the Court and would result in the Secured Claim and Priority claim being paid in full and the Unsecured Claims receiving at least something, albeit a fraction of what they are owed.

In each of the above Examples, had the Secured Claim not been bifurcated, the entire $120,000.00 Secured Claim would have to be paid in full before the Court would accept your Plan, meaning a monthly Plan payment in excess of $2,000.00 (when Trustee commissions are added in) would be required.  In each instance,  bifurcation of the Secured Claim creates a much smaller payment obligation for the debtor, and a much better deal. For a debtor able to make all required Plan payments the end result is that the tax debt is extinguished and the Tax Lien is released upon receipt of your Chapter 13 discharge.  At said time you no longer owe the government any money, and the Tax Lien no longer attaches to your real and personal property.

Contact our skilled lawyers in Middletown, NY

For highly skilled legal assistance with Tax Lien issues please contact Michael O’Leary, Esq. at Hayward, Parker & O’Leary, Esqs., who for over 30 years has been assisting clients throughout Orange County, including the areas of Middletown and Newburgh.

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