Home equity and tax liens in foreclosure/bankruptcy

[st85204]

I feel like I got burned in Chapter 7 several years ago. My understanding was that state and federal tax debt would be priority and covered by equity in the home I gave up. Instead I ended up with a shiny federal tax lien and, recently, Arizona has just filed suit for pre-petition income taxes.

One reason for the bankruptcy is that I am underemployed and my income is a quarter of what it used to be. After four years of failed job hunting I should easily qualify for noncollectible status. I've considered submitting an offer in compromise with a small monthly payment to the IRS once I get above that threshold. With the state I'm not sure yet what options are available.

Unfortunately though I really don't even understand how I got to this point.

Some background: BK filed August 2017. Home foreclosed and ready for trustee sale. I had about $70K equity and owing about $90K with a HELOC of $75K. There was also an HOA judgment for about $9K. Again, I gave up the home thinking the taxes would be paid first and the remainder wiped away.

Back taxes came to about $60K on the nondischargeable years. I filed 2016 taxes along with the BK. Taxes were always timely though typically under extension. All the rest was credit cards. No assets.

The credit union HELOC lender bought the mortgage and then sold it to some criminal (literally) real estate guy out of San Diego. He basically told me I would get cash back from him out of all this. I only spoke to him a few times on the phone.

I paid a cheap BK attorney whose representation package allowed essentially one phone conversation near the beginning of the whole process. I was given no expectation of my ultimate outcome and certainly never thought to ask. Somewhere out of the blue I got yet another letter about the same huge pile of taxes I still owe. At that point I don't think I knew there had even been a discharge. When I called the attorney to figure out what had happened all she offered was something like "the trustee must have decided to do it that way."

At the beginning of March 2018 the state filed a tax lien. Some three weeks later they filed a partial lien release. It always bugged me that it was termed "partial" but I hadn't heard from them since and subsequently forgot. The lien included tax years 2011, 2013, 2014, 2015, 2016 and totaled ~$5500 with tax and penalty taking it up to ~$8100. (The IRS didn't file their lien until the end of 2018.)

The judgment and state taxes were apparently a surprise to the home buyer. I never understood why he wasn't aware of the details of my case. He then had to negotiate with the HOA and I assumed he paid the state taxes in full in order to release the lien. I never received any documentation for any of these things nor did my worthless attorney do anything to fill me in about anything. I voluntarily signed the property over in lieu of trustee sale. After he shelled out that extra cash there supposedly wasn't enough left to give me a cut he had planned.

The interplay of lien positions plus taxes with foreclosure and bankruptcy was clearly something I hadn't fully wrapped my head around. And now this: Arizona seems to believe I still owe them ~5200 in taxes (plus another $1300 added on. These numbers don't clearly line up with figures from the original lien either.) I'm not asking for mindreaders but perhaps somebody has an idea about what's going on.

This new situation has just come onto my radar. For the last three years I've already been worrying about the IRS coming along and levying my bank account. Yes, I intend to talk to a tax attorney at some point if I can afford it but I really need to be up to speed on everything as much as possible.

So these are my questions:

1) Why didn't the trustee pay off all the taxes rather than letting the lenders keep their money?

2) Would the state have given up their property lien without full payment?

3) Why would the post-discharge state tax lien include taxes from 2011 and 2013?

-Thanks

[despritfreya]

Your post is all over the place and not making much sense. Please answer the following questions:

1. Was the home your residence?

2. What was the value of the home when you filed bk?

3. How much was owed on the 1st mortgage when you filed bk?

4. How much was owed to the HOA when you filed bk- the total amount, not just the judgment?

5. How much was owed to the 2nd (HELOC) mortgage when you filed bk?

6. Did the taxing agency record a lien against the home BEFORE you filed bk?

7. Did you file your 2011, 2012, and 2013 tax returns on time - with extensions that would be by October 15 of the year they were due (excluding consideration for weekends or any “holiday”)? If they were filed on time, were there any audits?

8. Did you file the Chapter 7 after or before the 2013 tax return was due? Please note that taxes owed after 2013 were not old enough to even think about discharging in a 2017 bankruptcy The 2013 tax would have become 3 years old either in April or October, 2017 so if you filed bk before 2013 became 3 years old it was not dischargeable either.

9. If you are willing to tell this - who was the Chapter 7 Trustee. Initials should be enough.

You have to understand, the Trustee has no duty to liquidate property unless he/she believes there will be value after all valid liens are paid. You are correct that if assets are liquidated, priority claims will be paid before any money trickles down to the general unsecured creditors.

If the Trustee did not administer the property and the property was subsequently foreclosed, the foreclosure, by operation of law, wiped out any lien junior to the lienholder that was foreclosing. This means, if the 1st mortgage holder did the trustee sale and the property was “purchased” by the 2nd, the 2nd paid off the 1st and took care of the HOA. Any lien that was junior to the 2nd was wiped out so, if there was an IRS/AzDOR lien that was recorded after the 2nd mortgage lien, it did not get paid when the property was foreclosed.

Des.

[justbroke]

I just wanted to follow this thread. This is an interesting interplay between taxes (federal, state/local), a trustee sale/foreclosure, and bankruptcy.

[st85204]

My apologies if the post was confusing. I tried to preview the highlights and my broad perspective in the first few paragraphs and then offer all the extra details I thought might be relevant. When debugging software it's frustrating to discover that important information was left out.

While searching for the trustee name I stumbled across an email that I sent to my attorney in February 2018 after receiving a state tax notice. Her response: "In your case, the Trustee declared there will be no distribution of assets, thus creditors were not called forth to file any claims."

Please answer the following questions:

1. Was the home your residence? Yes

2. What was the value of the home when you filed bk? I believe about $220-240K per Zillow. The investor did some repairs and sold for $300K.

3. How much was owed on the 1st mortgage when you filed bk? ~$105K. The number above is incorrect. I ran an amortization table and this number sounds right.

4. How much was owed to the HOA when you filed bk- the total amount, not just the judgment? ~$9K with accrued interest, perhaps an addition $500 for missed HOA fees.

5. How much was owed to the 2nd (HELOC) mortgage when you filed bk? ~$72K. I revised this downward from the earlier estimate.

6. Did the taxing agency record a lien against the home BEFORE you filed bk? No

7. Did you file your 2011, 2012, and 2013 tax returns on time - with extensions that would be by October 15 of the year they were due (excluding consideration for weekends or any “holiday”)? If they were filed on time, were there any audits? Yes, all returns were timely. No audits.

8. Did you file the Chapter 7 after or before the 2013 tax return was due? Please note that taxes owed after 2013 were not old enough to even think about discharging in a 2017 bankruptcy The 2013 tax would have become 3 years old either in April or October, 2017 so if you filed bk before 2013 became 3 years old it was not dischargeable either. I filed August 2017. 2013 does not seem to be in question. The federal tax lien doesn't not include it. I was unable to confirm the exact date of that return though.

9. If you are willing to tell this - who was the Chapter 7 Trustee. Initials should be enough. DU

You have to understand, the Trustee has no duty to liquidate property unless he/she believes there will be value after all valid liens are paid. You are correct that if assets are liquidated, priority claims will be paid before any money trickles down to the general unsecured creditors.

If the Trustee did not administer the property and the property was subsequently foreclosed, the foreclosure, by operation of law, wiped out any lien junior to the lienholder that was foreclosing. This means, if the 1st mortgage holder did the trustee sale and the property was “purchased” by the 2nd, the 2nd paid off the 1st and took care of the HOA. Any lien that was junior to the 2nd was wiped out so, if there was an IRS/AzDOR lien that was recorded after the 2nd mortgage lien, it did not get paid when the property was foreclosed. (There was never a trustee sale.)

Des.

So yes, I did have the impression that the IRS's claims to the bankruptcy estate would supercede even the mortgage lenders'. I guess that my understanding was pretty much that a liquidation was automatic and obviously that's not true. The numbers above would suggest that I lost $20-60K that could have been distributed to the tax balances.

And I still don't understand why the state would bother with a lien against a property that had already been foreclosed on. In the email I mentioned finding earlier, I noted to my attorney that I talked to the AG and they weren't even aware of the bankruptcy from six months earlier.

So the lien was probably a mistake?

Should they have corrected the lien amount to remove the discharged years?

Would the investor have to pay a lawyer to get the partial release?

[despritfreya]

This home was your residence. My guess is that you listed a homestead exemption up to $150,000.00 on Schedule C. The equity in the home, without considering the cost of sale, was only $53,500.00 based upon the numbers you have given. Dale would not have taken an interest in the home since there was no value in it for the bankruptcy estate.

Once the protection of the automatic stay ended the 1st mortgage holder foreclosed (by way of a Trustee Sale). The 2nd was the successful bidder at the Trustee Sale. Nothing would have gone to the bankruptcy estate.

As to the 2013 taxes, if you filed for an extension then that tax year was not more than 3 years old when you filed bankruptcy in August, 2017. It probably was not discharged.

As to AzDOR not knowing about your bankruptcy, I can assure you it did regardless of what someone said to you, unless that someone was Chris D. or Matt S. at the AG’s office. The tax collection department at the AzDOR gets notice of every, and I do mean “every” bankruptcy filing in Arizona.

As to the filing of a lien after you got your discharge, such is proper as it relates to taxes that were not discharged. The lien will attach to anything in your name. I have no idea why it would attach to property you lost to a foreclosure unless it was recorded before the lien of the party that foreclosed.

If this post discharge lien includes a tax year that is subject to the discharge the easiest way to handle it is to call either Chris or Matt (or their paralegal) to find out what you or they can do to correct it. You can get the contact information from your attorney.

Please keep us posted.

Des.