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Recent Blog Posts
The Surprising Benefits: Chapter 13 Handles an Income Tax Lien on a Tax that Can't Be Discharged
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.
Lawsuit Highlights the Issues with Debt Settlement Services
Recently, the Consumer Federal Protection Bureau (CFPB) initiated a lawsuit against the nation’s largest debt settlement services provider, Freedom Debt Relief. According to the claims, this formerly well-regarded company was not telling the truth as far as their fees and the reach of their capabilities. Unfortunately, this is not the first, nor the last debt settlement company openly deceiving clients to earn their trust and boost their profits. These are a few of the top complains that surfacing from the litigation.
Debt Settlement Promises Are Misleading
Clients complain that Freedom Debt Relief led them to believe that all of their debts were negotiable and would settle within months. Unfortunately, debt settlement services do not have the capabilities of stopping collection attempts. Therefore, many clients continued experiencing harassing phone calls, emails, and postal collection attempts, many of which went further into collections or resulted in judgments. Filing for bankruptcy is the only method that places an automatic stay on all collection attempts; meaning, foreclosure, repossession, and harassment all must come to an abrupt stop.
The Surprising Benefits: An Income Tax Lien on a Tax that Can't Be Discharged
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
The Surprising Benefits: Chapter 13 AFTER the Recording of an Income Tax Lien
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.
The Surprising Benefits: Chapter 7 AFTER the Recording of an Income Tax Lien
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?
How Bad is Bankruptcy for Your Credit Score?
One of the first questions most people ask when considering the bankruptcy option is, “How badly will this impact my credit score?” For many, this fear becomes large enough that it prevents any action, whatsoever. In fact, when surveying any portion of the population, most people agree that the lasting impact on their credit rating is to blame. It is true that filing for bankruptcy will remain on your credit report for up to ten years; however, there are many factors to consider before determining whether bankruptcy is or is not the right solution for you.
The Impact Does Not Last for Ten Years
If you file for Chapter 13, bankruptcy will only remain on your credit score for seven years; Chapter 7 is ten years. However, with each year that passes, the impact bankruptcy has on your credit report diminishes. Recent activity influences your score far more significantly than a negative history. After filing, keep up with your budgetary plan, and you will successfully rebuild your credit quickly.
The Surprising Benefits: Chapter 13 Stops the Recording of an Income Tax Lien
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).)
The Surprising Benefits: Chapter 7 Stops the Recording of an Income Tax Lien
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.
Small Business Bankruptcy in Texas
The modern business world is tough, especially for smaller firms. If your small business has run into serious financial distress, you are far from alone. Right now, it may be time for your company to review its available options, to work towards shedding or restructuring some of that overly burdensome debt. Bankruptcy is one option that is on the table for your company. However, it is certainly not the only option and it is not always the best option. Here, our experienced San Antonio business bankruptcy attorneys offer tips for weighing whether or not it is time for your small business to file for bankruptcy protection.
Know Your Situation, Know Your Finances
When your business is facing financial distress, it is time to take a very hard look at the books. You need to know your finances, your assets, your debts and your projected future revenue like the back of your hand. Indeed, the key to making the best possible decision is knowing the true financial standing of your company. It is imperative that you enter the debt restructuring process with full knowledge and a clear head.
The Surprising Benefits: Fraud Debt Collections in Bankruptcy
Being accused of defrauding a creditor is unusual in consumer bankruptcy cases. A creditor would have to jump through significant hoops.
Most Debts are Discharged (Permanently Written Off) in Bankruptcy
The federal Bankruptcy Code has a list of the kinds of debts that are not discharged. This list details the conditions under which these kinds of debts don’t get discharged. (See Section 523 on “Exceptions to discharge.”)
Essentially, all your debts get discharged unless any of them fit one of the listed exceptions.
The Fraud Exception
One of the most important exceptions to discharge is the one stating that debts, “to the extent obtained, by... false pretenses, false representation, or actual fraud,” might not be discharged. (Section 523(a)(2)(A) of the Bankruptcy Code.)
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