The IRS can put liens on any property to satisfy a debt you owe that arises from an income tax bill. Debts to the IRS cannot be discharged due to bankruptcy, but there are some ways to prevent a tax lien by filing for Chapter 13 bankruptcy protection. The attorneys at Groce & DeArmon explain in today’s blog.
Filing for Chapter 13 bankruptcy creates an automatic stay against creditors. This means that once the bankruptcy court approves your petition, no creditors can attempt to collect a debt from you.
Even the IRS must stop any collection efforts, and it cannot file a lien against your property after you file for Chapter 13 bankruptcy and when you’re repaying under the court-approved plan. However, any tax liens made against your property before you file for bankruptcy protection are still valid and cannot be automatically discharged.
Payment Plans Under Chapter 13 Bankruptcy
Chapter 13 bankruptcy means you create a payment plan to repay your debts. Some creditors may lower the amount of debt you owe, but they aren’t required to do so. An income tax lien earns proceeds from the sale of your personal property, such as a house. The debt you owe the IRS could become part of your repayment plan and the agency could offer a compromise to collect the debt.
Equity in Your Home
One key to handling a tax lien through Chapter 13 bankruptcy is the amount of equity in your home at the time of the tax lien. Equity means the home’s value above the amount you owe on the mortgage.
If your home has zero equity, selling your home wouldn’t pay off the tax lien because the sale proceeds would likely be used to pay the debt on the mortgage first. If you have zero equity, or less equity than the IRS tax lien amount, the remaining tax lien becomes an unsecured debt.
For example, imagine your home is worth $150,000 and you owe $145,000 on your mortgage. In this situation, your home’s equity is $5,000. The IRS places a tax lien on your home for $7,000. Only the first $5,000 of that lien is secured. The remaining $2,000 turns into an unsecured debt, which you can make part of your payment plan in Chapter 13 bankruptcy protection.
Need More Help? Talk to Groce & DeArmon
Everyone’s financial situation is different. At Groce & DeArmon, we come up with a customized Chapter 13 bankruptcy repayment plan to present to the court and your creditors. We try to give you the best possible result in a very stressful situation. Contact Groce & DeArmon or call toll-free 1-800-640-3706 for more information.