Save your home by catching up on real property taxes and securing the release of recorded income tax liens.
When it comes to your home, bankruptcy hugely helps by providing effective ways to deal with debts that are secured by liens against your home’s title. Of the four most important home lien-resolving tools of bankruptcy, we cover property taxes and income tax liens today. We’ll get to judgment lien “avoidance” and junior lien “stripping” in our next blog post.
1. Catching Up on Property Taxes
Falling behind on your home’s property taxes is dangerous for two distinct reasons:
- If the county or other taxing authority does a tax foreclosure on your home, you would not only lose your home but would often still owe your mortgage(s). That’s because the lien held by the taxing authority usually comes ahead of all the liens on your home’s title. So its foreclosure would wipe out the liens of everyone else on the title, including your mortgage(s).
- Because of this potential for your mortgage holder to lose its collateral, it gets very nervous if you fall behind on your property taxes. It does not want its secured debt to turn into an unsecured one. And so it gets very aggressive with you when you fall behind on the property taxes. It would much prefer to foreclose you out of your home than be foreclosed out of its rights to the home by the property taxing authority.
Theoretically, filing a Chapter 7 “straight bankruptcy” case may discharge your other debts and leave you with enough disposable income so that you could catch up on your property taxes fast enough.
But there’s a good chance you’ll need the much greater protections of a Chapter 13 “adjustment of debts” bankruptcy. That usually allows you to stretch out your catch-up property tax payments over as long as 5 years. This reduces each month’s payment, making catching up more affordable. And throughout that time the taxing authority could not proceed with a foreclosure or take any other collection activity, as long as you comply with the terms of your court-approved Chapter 13 plan.
Very importantly, Chapter 13 also prevents your mortgage lender from using you being behind on property taxes as justification for its own foreclosure. And if you are also behind on the mortgage loan, Chapter 13 can stretch out your catch-up payments on that for as long as 5 years as well, while protecting you from foreclosure and any other collection efforts of your mortgage holder.
2. Getting the Release of Income Tax Liens
If the IRS or state tax agency has recorded a tax lien against your home, this creates significant problems that aren’t resolved under Chapter 7.
If the tax for which the lien was recorded otherwise meets the conditions for discharge (the legal write-off in bankruptcy), the lien survives after the bankruptcy is finished. That means that you would likely still need to pay the tax in order to get the tax lien off your home’s title when you sell or refinance your home.
If the tax for which the lien was recorded doesn’t meet the conditions for discharge (usually because the tax is too recent), you have to try to pay off the tax after the bankruptcy is completed. But while doing so you have the extra burden of the lien. Through that lien sitting on your home IRS/state has more enforcement leverage against you to make you pay even if your circumstances change and you can’t afford to do so. Your home is at risk throughout this time.
In contrast, Chapter 13 provides powerful ways to deal with tax liens, no matter whether the underlying tax is dischargeable or not.
If the tax is otherwise dischargeable, Chapter 13 has a mechanism for determining how much, if anything, you have to pay to satisfy the tax lien. The amount to pay is based on the amount of home equity securing the tax lien.
If there is NO such equity (because the home’s value is no more than the mortgage balance(s) plus the debt amounts of any other prior liens), nothing is paid on the tax lien through the Chapter 13 plan. Then at the end of the case the tax itself is discharged, and the tax lien is released.
If there IS enough equity to require payment of all or part of the tax, the plan provides for that much to be paid. Then the rest of the tax is discharged at the end of the case, and the tax lien is released.
If the underlying tax is not dischargeable, and if there is no equity in your home securing the tax lien, the tax is paid through the plan, without any accruing interest and penalties. Then at the end of the case the tax lien is released.
And if the nondischargeable tax is secured by a tax lien with equity securing it in part or in full, interest has to be paid in the plan to the extent that the tax is secured by the home’s equity. Then at the end of the Chapter 13 case, after the tax and interest are paid, the tax lien is released.
Regardless whether the underlying tax meets the conditions for discharge, and whether there is any equity securing the recorded tax lien, the IRS/state is forbidden from taking any collection action throughout the life of the 3-to-5-year plan. As long as you are doing what you proposed and what the court approved in your plan, you don’t have to worry about what the taxing authorities are going to do to you and your home. And you know that at the end of the case you will no longer owe any taxes, and any tax liens will be released.
Please come back to our website in a couple days if:
- you have any judgments against you, which are likely liens against your home, to see if they can be “avoided,” and/or
- you have a second or third mortgage, to see if it qualifies for being “stripped” from your home’s title.