Tax Lien cannot be modified beyond end of Chapter 13 Plan

Posted by Kevin on September 4, 2011 under Bankruptcy Blog | Be the First to Comment

Now, this is a little advanced.  You open your mail in Hackensack and have been hit with a Notice of Federal Tax Lien.  Not good because it applies to all your property and, more importantly, the collection agent is the IRS.  The one thing that you do not want is for the IRS to start levying on your property to satisfy the lien.  That will ruin your day or year, for that matter.

Chapter 13 may hold a solution to your problem.  Unfortunately, it may only be a partial solution.  Debtor was hit with an IRS tax lien for a substantial amount of money.  He finds a creative bankruptcy attorney who puts the debtor into a Chapter 13.  The Plan treats the IRS lien like a mortgage; that is, a long term debt.  So, the debtor proposes to make payments during the course of the Plan, and then proposes to pick up payments after the Plan is completed.  Everybody happy (as Peter Griffen would say).

Well, not everyone.  The IRS objected.  They said that this was not like a mortgage in that the obligation has not fully matured.  The taxes were due and payable long before the Debtor filed.  In fact, they were  due and payable long before the tax lien was filed.

The case went all the way to the 5th Circuit.  Those judges sided with the IRS and said that the tax lien must be satisfied during the term of the Plan which was 5 years.

Clearly, not a home run for the debtor, but not a whiff either.  More like a double.  If there was no filing of bankruptcy and the IRS levied, the debtor would be looking at levies on his bank account and a wage garnishment.  By filing, he got the IRS off his back and was able to spread payments out over 60 months.  Much better than a levy.

Taxes and bankruptcy are a rather complicated area of the law.  It is not an area that a layman can take on.  Better find experienced and able bankruptcy counsel if you find yourself in this type of problem.