TAX LIENS IN BANKRUPTCY
In many of the Bankruptcy cases we file, the
clients have had a tax lien filed against them. After the Bankruptcy
is completed, the Tax Liens are often not released. They might remain
until something triggers the IRS to release the lien.
CHAPTER 7
This
issue of liens is
complicated when the Debtor has assets, particularly if the lien is for
more than the value of the assets. In Chapter 7, the lien is not
stripped down to the value of the collateral. The lien remains,
for its full amount on
the debtor's assets until it is released. (Dewsnup v.
Timm 112 S.Ct. 773.)
This creates a situation that can come back to haunt an attorney who
files Bankruptcy for a client, then, months or even years later,
the debtor discovers that there is a Tax Lien outstanding.
This matter is further
complicated if there are Judgments which have been avoided because they
impair the Debtor's homestead exemption. In that situation, does the IRS
move up in priority to take the place of the avoided judgment lien?
Our office has developed a methodology to deal with Tax Liens in Chapter
7. First, we always order an IRS transcript to determine what
liens have been filed, their amount and their validity. Second, we
advise the client of the liens and the implications. Third we
analyze the value of the debtors property. (Exemptions do not apply to
tax liens). Then we develop a plan to deal with the lien.
In our District, the Special Procedures Office or the
Bankruptcy Unit is who we deal with for liens after Chapter
7. They are well educated and reasonable to work with.
Depending on the particular situation, that
plan might
include:
1. Challenge the validity
of an invalid Tax Lien.
We have found that there are circumstances where
a Tax Lien avoidable or invalid.
To avoid a lien, it must be improperly filed. Examples
of an improperly filed lien are those where it is filed in
the wrong county or is being asserted against after acquired
real property, for taxes that were discharged. A more
frequent occurrence is where the Tax Lien has been filed in
the wrong name, such as a corporation rather than the
debtor. In an case where the IRS had the first
name spelled wrong, a Bankruptcy Court held the lien
invalid. In Re Reid 182 B.R. 443
Other examples of an invalid lien are where the IRS
failed to comply with state law or where they failed to
refile after the 10 year life of the lien. It has also
been held that a lien filed in violation of the automatic
stay is invalid.
Local practice will determine whether a lien may be
challenged by motion or must be challenged by adversary
complaint.
2. Requesting a Certificate
of Release from the IRS.
If the taxes have been discharged and the value of the
debtors assets is minimal we will just request that the IRS
release the lien. The IRS will usually release its
lien. If some of the tax has been discharged, but not
all, then the IRS will usually not release the lien.
3. Negotiate a release for
an amount to be paid.
We have found in our District that the IRS is usually
willing to negotiate a favorable resolution of the amount it
will settle for. The IRS simply doesn't want your
clients furniture or old car. Even equity in a parcel
of real estate may be negotiated for less than its real
value.
4. Advise client to wait
out the Statute of Limitations.
The tax lien is valid for 10 years from the date the
taxes were assessed (not 10 years from the date the lien was
filed). If that period is close to running we might
advise the client to sit tight and wait out the period of
time.
5. Liquidate the assets and
pay the funds to the IRS.
If the IRS won't negotiate a reasonable settlement, then
consider selling the assets and paying the proceeds to the
IRS in settlement of the lien.
6. File a Chapter 13 and
pay the value of the assets.
In Chapter 13, the debtor may strip the lien down
to the value of the collateral and pay that amount over the
life of the plan. We have found that the threat of a
Chapter 13 may also give some negotiating leverage in
settling the lien.
7. File an Offer in
Compromise.
If the amount of the tax lien is significant, and other
alternatives do not work, consider filing an Offer in
Compromise. For example, if your client owns a home
worth $200,000 and has a lien secured by a mortgage of
$160,000, in an OIC the house is presumed to have no
equity. The IRS uses 80% of real estate's value
for OIC purposes! An Offer in Compromise can be a
powerful tool in resolving tax liens.
There
are numerous other avenues to consider in obtaining a lien release in
Chapter 7.
