Dealing with IRS Debt that Can’t Be Discharge in Chapter 7

Surprising Benefits Of Chapter 13

Personal income tax debts that are older than 3 years may be discharged. For a fuller discussion see: Can I Discharge IRS Taxes In Bankruptcy?

After Chapter 7 discharge there are 2 types of tax that remain:

  1. Non-Discharged taxes; and,
  2. Tax Liens. The tax liability may have been discharged but the lien remains.

What To Do?

A Taxpayer may be able to deal with the IRS outside of bankruptcy. Bear in mind that interest and penalties will continue. The IRS may levy wages and/or bank accounts.

The second method is to file Chapter 13: Buys Time and may eliminate or reduce liens.

Chapter 13 allows you to pay the Non Discharged tax debts in an orderly manner: up to 5 years. Interest and penalties stop. The IRS will not levy your wages or your bank account nor will they file new liens.

Tax Liens

The IRS often files tax liens on all the property of the taxpayer in the county where he/she lives.

Chapter 7 may have discharged an old tax debts but it may have a lien.

  1. Real Estate. An IRS lien has a life of 10 years and can be renewed. If you want to eliminate the lien or deal with see below: IRS Tax liens and Chapter 13 and IRS Liens on Your Home.
  2. IRS liens on the personal property don’t pose a problem:
    1. If you move to another county it goes away;
    2. The IRS exempts $6,250 of household furniture and personal effects from levy. (26 U.S. Code 6334). The IRS is not in the business of selling used furniture.

Chapter 13 and IRS Liens On Your Home

To eliminate; reduce, or pay the tax liens one has to calculate equity before the IRS lien: the market value less senior liens including mortgages and even real estate taxes. (The Illinois homeowner’s exemption can’t be used against IRS liens.)

  1. No equity. Market value is $250,000 and the mortgage(s) balances exceed $250,000. In Chapter 13 the lien will be avoided in its entirety;
  2. Some equity. Market value is $250,000 and senior liens total $240,000. Lien is $25,000. A Chapter 13 plan will have to pay $10,000 for a period up to 5 years. The balance of the lien is eliminated.
  3. The equity is great enough to pay the lien. The market value is $250,000 and senior liens total $230,000. The lien is for $18,000. The Chapter 13 plan will have to the $18,000. You have up to 5 years to pay it and further interest is likely eliminated as well as penalties.

The above scenario is where the taxpayer filed Chapter 7 and after the discharge filed Chapter 13.

Most folks file Chapter 13 in the first place. The tax debt is bifurcated into what is dischargeable and what is not. Likewise, liens are handled based on equity. The main difference is that dischargeable debts will have to pay a dividend, generally around 10%.

Disclaimer: Posting on legal matters is for information purposes only and is not to be construed as legal advice.

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