Does tax lien which exceeds equity in home prevent trustee from taking home in 7 bk?

[Phoenix2012]

I owe several years of back taxes and will soon be hit with a federal tax lien of about $250,000. Additionally, I have about $80,000 in credit card debt which I recently stopped paying due to the failure of my business. I have about $80,000 equity in my home but due to the current mortage crisis and my financial problems I am unable to refinance my home to cash out my equity. It would be impossible to sell my home in this market unless I gave it away, thereby losing most if not all of my equity. My current income is barely allowing me to scrape by and I foresee no possibility of my circumstances improving such that I could ever pay down my debts. I understand the requirements for discharging tax debts, and for me, this means that I must wait until 2012 to file chapter 7 and discharge my tax debt.

I have read various things on the internet that appear to possibly suggest that a large tax lien which would encumber all of the equity in my home would mean that the trustee would not take my home as the lien would not leave anything for the trustee or distribution to my unsecured creditors. As I understand this, my home would be considered to have no equity due to the tax lein. I would keep my home though the chapter 7, although the property would still be subject to the tax lien which would survive the bankruptcy.

Can anyone with professional expertise or personal experience confirm whether this assumption is correct? Specifically, I am trying to determine whether the trustee would take my home, sell it, and partially pay off the tax lein. Or would the tax lein encumber my equity such that the trustee could or would not sell the house, causing the bankruptcy to be classified as a no asset case.

I'm hoping that I can keep the house, even with the tax lein attached.

[debtmonster]

Man, if that were me, I would permanently move out of the country. $250k owed to the feds?!?! I'd be OUTTA HERE. No way would I stick around for that nightmare to unfold.

[hereforinfo]

If it isn't possible to sell your home for that amount, then you probably don't actually have $80k in equity.

[biotechsolution]

The tax lien would survive the chaper 7 and be attached to anything
that you have exempted in your bankruptcy. So yes if your home increases
post bankruptcy and you sell your house the tax lien would have to be paid
off. In a chapter 13 you could strip the lien down to what your exempt assets are worth and pay it off has a secured creditor.

[HHM]

You have bigger problems then the trustee taking your home. If you are barely scraping by and about to have a $250K tax lien placed on your home, odds are, you are going to lose your home in the near future anyway.

But to answer your question, yes; if the home is fully encumbered, the trustee cannot take your home.

[Phoenix2012]

Thanks for the replies. I have enough income to eat, pay utilities, and make the mortgage payment. However, because my income is barely enough to survive, I believe I can get classified by the IRS as "currently not collectable" thereby protecting me from IRS levy or wage garnishment. The IRS has a policy of not seizing a primary residence in most cases so I believe I'm OK there.

I understand that if the home is fully encumbered the trustee cannot take it. What I need to be certain about is would a tax lien definitely cause the equity in my home to be fully encumbered without exception? Or does the trustee or bankruptcy court have the ability to to strip away, remove, or otherwise work around a tax lien in such a way that would allow the trustee to take my home?

[HHM]

But that's thing, if your income is "barely" enough to survive, that means your expenses are too high (i.e. the house).

Keep in mind, CNC status with the IRS is based on IRS allowed expenses, not necessarily your actual living expenses, so, if your mortgage payment is more than the standards, the IRS may disallow the extra portion and deny CNC status.

Instead of speaking hypothetically, what are your numbers? What is your income, what are your mortgage payments, etc. That will help clarify some issues.

[Flamingo]

Thanks for the replies. I have enough income to eat, pay utilities, and make the mortgage payment. However, because my income is barely enough to survive, I believe I can get classified by the IRS as "currently not collectable" thereby protecting me from IRS levy or wage garnishment. The IRS has a policy of not seizing a primary residence in most cases so I believe I'm OK there.

I understand that if the home is fully encumbered the trustee cannot take it. What I need to be certain about is would a tax lien definitely cause the equity in my home to be fully encumbered without exception? Or does the trustee or bankruptcy court have the ability to to strip away, remove, or otherwise work around a tax lien in such a way that would allow the trustee to take my home?

I don't belive a trustee or anyone can work around, remove, strip, etc. a federal tax lien. You are getting into some major tax law questions and may need to consult with a good CPA or tax law attorney.

[Phoenix2012]

I believe the federal tax lien would apply to all of my property in addition to my home. Does this mean that all of my property would be encumbered such that nothing would be available to the trustee, thereby making me a no asset case?

As for CNC status, I believe the IRS allowed numbers are comparable to the chapter 7 means test so if am positioned such that I can pass the means test, I should likely also qualify for CNC status. Total combined income of my wife and I is about 40K with 3 kids to support. Mortgage is only $1050 month (I couldn't rent a house for less than that) Owe $94K on mortgage and county tax appraised value of home is $177k. 2 cars which are paid off are worth about $2500 each and no other significant assets.

If I am classified as "no asset" due to tax lein I could possible keep everything, subject to the tax lien of course. However, if the trustee can get around the tax lien such that it does not fully encumber my home and property, I would expect to lose everything in the bk as a tax lien impairs all exemptions.

So the bottom line is that my situation is apparently all or nothing:

If the tax lien encumbers all of my property I would expect that would force a no asset case and I would keep my property, with the tax lien still attached.

If the trustee can get around the tax lien then he would literally take everything due to my exemptions being impaired by the tax lein.

I have not had much luck finding a definitive answer on the internet. Does anyone have personal experience with large tax liens in a chapter 7?

Thanks for all of your assistance!

[BnkrptcyLwyr]

BE VERY CAREFUL IN HOW YOU PROCEED

Just because the lien survives does NOT mean that the debt will not be dischargeable at some point in the future.

The lien is peanuts compared to the personal liability surviving.

In short, when someone has such a huge tax bill ... it may be better to wait. I advised a potential client that he would be better off waiting and having the IRS garnish him for a year than file now and making sure that the debt is not dischargeable (the IRS would end up garnishing less than what you would get to ultimately discharge). If the IRS garnishes 10k and you discharge the additional 50k - you're better off than having 60k in nondischargeable tax debt.

It would be helpful if you gave us some more details ...

What is the breakdown of the taxes owed, and for which years?

Were all tax returns filed timely? Did you even file?

Were tax returns filed late, and if so, when?

When were the tax assessments made?

Were you charged with filing false or fraudulent returns?

This is tricky stuff and depends on the TIMING of the filing ... AND YOU NEED REALLY GOOD ADVICE BEFORE PROCEEDING. If you slip up and file at the wrong time, you could convert dischargeable debt into nondischargeable debt.

Please email me privately if you would like to talk to me over the phone. This is one area where bankruptcy attorneys (in their hurry to file their client) have completely screwed over their clients (in their eagerness to make a buck).

[BnkrptcyLwyr]

In short - keeping your house is not the issue and should not be the issue. Ridding yourself of the tax debt and discharging the tax debt is.

[HHM]

In short - keeping your house is not the issue and should not be the issue. Ridding yourself of the tax debt and discharging the tax debt is.

Very good point.

[Phoenix2012]

The taxes were filed late and due to the failure of my business in 2008, I will be unable to pay 2008 taxes in addition to the late filed prior year taxes. I have thoroughly researched and understand the requirements to discharge tax debt and that in order for all of my tax debt to be dischargeable, I must wait until after April 15, 2012 to file the 7, (provided I am not audited and assessed in the 240 days prior to April 15 2012)

This will ensure that my personal liability for the tax is eliminated in the bk, but a tax lien will survive on any property that I carry through the bankruptcy.

I believe that if I can be classified as currently not collectable by the IRS, I can endure the 3 years I must wait to file bk.

I believe I have a full understanding of how to ensure that my personal responsibility for the tax debt will be eliminated in the bk.

What I have been unable to determine is whether I will be considered an asset case and consequently lose everything. Or will the tax lien encumber all of my property such that the trustee must classify me as a no asset case, meaning that I would keep my property with the tax lien still attached and surviving the bk?

If I can keep my home through the bk I can wait out the 10 year IRS statute of limitations after which time the tax lien will expire.

But this all depends on whether the tax lein would cause my case to be classified as no asset and that is the question to which I have been unable to find a definitive answer.

[BnkrptcyLwyr]

Some additional information ...

Are the taxes for payroll taxes for employees? Then these are "trust fund" taxes and are never dischargeable.

Even if the tax returns are filed late, that doesn't make them dischargeable. For example, if the tax is from 2003, and you filed the return in April 2006, you don't need to wait till April 2009, you need to wait until after 240 days after the tax returns were filed, and x amount of days until after the taxes are assessed (I'm being a little lazy right now and not going to look it up). So, let's say that the overwhelming bulk of the taxes were from earlier years and were like from 2000-2004, and you had 10k owed in 2008 - you may be alright quicker than you think. You might file now and not care about the 10k - and work to pay that off - so long as you can discharge the other 240k!

Again, you need to know the following information:

The year for which taxes are owed.

The date a return was filed for that tax year.

The date that an assessment was made for that tax year.

Proceed carefully.

[BnkrptcyLwyr]

The tax lien counts in reducing your equity. Meaning that the Trustee won't touch your house.

Again though. The house IS NOT important ... discharging the tax debt IS important.

So you lose the house ... at least they're not able to garnish you and follow you into oblivion.