Tax Liens and What Happens During Bankruptcy
A “tax lien” is often imposed on a property as a means of securing the payment of back-owed taxes and the IRS will issue this tax lien to ensure that it gets paid no matter what. And if the IRS files a tax lien against you it can ruin your credit, prevent any pending real estate closings, and also potentially damage your reputation. And sometimes tax liens are not removed even after a debtor has paid them off.
Notice of Federal Tax Lien
The IRS is able to file a Notice of Federal Tax Lien after it assesses the liability, sends a Notice and Demand for Payment, and the debtor fails to pay in full within 10 days of of receiving the notice. The IRS will also file a notice of lien as a way of alerting creditors. This tax lien is used to establish priority in bankruptcy proceedings as well as real estate sales.
A lien will last for 10 years, and are usually released automatically as long as the IRS does not refile them.
It’s best to try and get a lien removed immediately by: paying the tax, interest and penalties; or posting a bond that guarantees payment.
Tax Debt and Bankruptcy
Additionally, back-owed tax debt is something that cannot be discharged through bankruptcy. Tax debt will still need to be paid after you exit Chapter 7 bankruptcy, or will need to be repaid in full through a Chapter 13 bankruptcy repayment plan.
Other Things That Cannot Be Discharged Through Bankruptcy
Like tax debt, most debtors are not able to discharge student loan debt through Chapter 7 or Chapter 13 bankruptcy. Still, there have been cases where student loan debt has been discharged. In these cases, the debtors were able to prove that repaying the loan would cause an undue hardship.
To understand why student loan debt cannot be discharged, you first need to understand that there are dischargeable debts (you will be released from paying) and non-dischargeable debts (you cannot be released from paying).
A common example of dischargeable debt is a credit card loan. Common examples of non-dischargeable debts are taxes, alimony, spousal support, child support, and student loans.
Student loan debt is non-dischargeable due to the belief that there are societal benefits to promoting access to higher education. Educated workers that have attended college are believed to be able to command higher salaries and are thus, better able to take part and compete in the global economy.
While it is rare for student loan debt to be discharged, there is a way, a debtor must prove that paying back the debt imposes an undue hardship on the debtor and any dependents of the debtor. The process of proving this can be extremely difficult for most debtors because it requires filing a lawsuit against the loan creditor.
Often times these cases have been won due to the fact that the debtor was suffering from a severe and permanent disability that drastically restricted their ability to earn a certain level of income.
To prove undue hardship, the debtor must prove the following:
- Based upon current income and expenses, the debtor is unable to maintain a “minimal” standard of living for himself or herself (and his or her dependents) if required to repay the student loans;and
- Additional circumstances exist that indicate this lifestyle is likely to persist for a significant portion of the repayment period of the student loans; and
- The debtor has already made documented good faith efforts to repay the student loan debt.
As you can see, this can be a very difficult case to prove. As with any bankruptcy, it’s always advised that you work with a phoenix chapter 7 bankruptcy lawyer.
Domestic Support Obligations
A general rule for bankruptcy is that debt for “domestic support obligations” is not dischargeable. These support obligations include child support, alimony, or debts decided under property settlement agreements.
What Can You Do?
If you are facing large amounts of debt that cannot be discharged in bankruptcy, bankruptcy might still be an option for you. Often times declaring bankruptcy will allow you to discharge other debts so that you can pay down the debts that cannot be discharged.
As with any major decision in your life, there are pros and cons of filing bankruptcy. You’ll want to discuss your options with a phoenix chapter 7 bankruptcy lawyer.
Pros and Cons of Filing Bankruptcy
One immediate advantage that helps debtors when they file for bankruptcy is the “automatic stay.” This motion alerts creditors that they must stop their efforts to collect money from debtors. This stay is what stops creditors from calling you! Under an automatic stay, creditors are not allowed to call, send collection letters, file lawsuits, garnish wages, or seize assets, except for in specific situations such as the collection of alimony and child support payments.
One con of bankruptcy is that it will affect on your credit score. While your credit might already be low because of delinquent payments, once a bankruptcy is filed, it’s required by the national credit reporting agencies that it appears on your credit report. A chapter 7 bankruptcy will stay on your credit report for 10 years and a chapter 13 will stay for 7 years.
The impact on your credit can hurt your future ability to qualify for a future loan or credit card. It might also affect your ability to be hired or secure living arrangements. Some employers and future landlords evaluate a persons credit score to determine if they are good candidates.
Still, if you are facing large amounts of debt, the con of having the bankruptcy on your credit report might seem minimal when compared to the fact that you have freed up some money to pay of the debt and pay down the debts that cannot be discharged.
One you have decided that you will file, you’ll want to choose which form of bankruptcy to file.
Types of Bankruptcy for Individuals
A phoenix chapter 7 bankruptcy lawyer will be able to review these further with you, but the most common types of bankruptcy for individuals: chapter 7 and chapter 13:
- A chapter 7 bankruptcy liquidates all non-exempt assets to pay off the debt you owe to creditors. This is typically considered the best option when you have little income and a large amount of unsecured debt. Unsecured debt includes: medical bills and credit cards.
- A chapter 13 bankruptcy reorganizes debt and establishes a repayment plan to pay debt owed to creditors. This is considered the best option for debtors that have income, but are needing some breathing room to be able to catch up on outstanding debts.
After you have filed for bankruptcy and been through the process, and your debts have been discharged it’s important to remember that there are ways to improve your credit score. This process can be started within six months to a year after the discharge is complete. These days, lenders tend to look more at credit scores than the comments that are on a credit report. This means that if you are actively working on rebuilding your credit, a lender will take that into account.
One first step is to review all of your credit reports, and often, to verify that all the information is correct and up to date. Stay on top of your credit reports, and as soon as the debt is discharged make sure it is reported. You can also contact a credit bureau to ensure that discharged debts do not show up as current debts.
You can also obtain a secured credit card that requires collateral, such as a cash deposit or savings account. If you are able to make payments in a timely fashion, a credit card will usually drop the requirement for collateral. This allows you to prove that you are capable of paying back debt in a timely fashion.
Working with a bankruptcy attorney can help you get back on your feet, especially if you are dealing with large amounts of debt that might not be discharged. Often times this means declaring bankruptcy on the debts that can be discharged so that you can pay down what cannot be.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix chapter 7 bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008