More Bankruptcy Advantages with The Foreclosure Moratorium
Feb. 22, 2021
In the midst of the foreclosure moratorium, you may be dealing with or trying to avoid judgment or income tax liens. Bankruptcy hugely helps.
Last week we wrote about the ongoing foreclosure moratorium and the related mortgage forbearance opportunities. We discussed how bankruptcy can hugely increase the practical benefits of this for you and your home. We gave 6 important examples how bankruptcy can really help. Here are 4 more.
1. Judgment Lien “Avoidance”
Let’s say that during the last year of pandemic you’ve fallen behind on a debt or two and been sued. You didn’t respond to the lawsuit and a judgment was entered against you, and a lien put on your home. If you haven’t had to pay your mortgage because of a forbearance agreement, that doesn’t help with the judgment lien. You feel that debt and its lien on your neck and it’s appropriately really concerning you.
You may be able to legally get rid of such a judgment lien in bankruptcy. This happens if that judgment lien on your home’s title is “impairing” your homestead exemption. The homestead exemption is a specific dollar amount of equity that’s protected in bankruptcy. (The amount greatly varies depending on which state your home is in.) Your homestead exemption amount is “impaired” by the judgment lien if that lien “eats into” that protected homestead equity.
Assuming you qualify, judgment lien avoidance turns a secured debt that you’d have to pay to protect your home into an unsecured debt. Section 522(f)(A) of the U.S. Bankruptcy Code. You could then usually discharge (legally write off) that entire unsecured debt in a Chapter 7 “straight bankruptcy” case. Or you could pay relatively little or even sometimes nothing on that debt in a Chapter 13 “adjustment of debts” case. Instead of being stuck with that judgment and the lien on your house, you’d be free of it. Free both of the debt and the lien on your home.
2. Prevent Upcoming Judgment Liens
Now let’s say that you’ve fallen behind on a debt or two but have not yet been sued. But you expect to be. Or you’ve just gotten a summons and complaint announcing a creditor’s lawsuit but you still have time to respond. Either way, your creditor has not yet gotten a judgment against you and a lien against your home.
Filing bankruptcy immediately stops both ongoing and future lawsuits against you. That way the lawsuits cannot turn into judgments against your home (and possibly your other assets). This power that bankruptcy gives you is called the “automatic stay.” Section 362(a)(1) and(6) of the Bankruptcy Code.
First, ongoing lawsuits are stopped in their tracks so they can’t turn into judgments. Second, creditors which haven’t sued you already can’t ever do so (with some rare exceptions). In both scenarios, being unable to get a judgment, these creditors can’t ever record a judgment lien against your home.
The timing is particularly important here. All judgment liens can’t necessarily get “avoided” under the procedure referred to in #1 above. So once there’s a judgment lien on your home it may be too late. You may be stuck with that as a debt secured against your home. Then you may well have to pay it instead of being able to discharge it in bankruptcy. So it may well be crucial to file with your bankruptcy lawyer before a creditor gets its judgment. You stop the lien from coming into existence, and then can dispense with that debt through a bankruptcy discharge.
3. Prevent Income Tax Liens
Now assume that in these crazy times you’ve gotten behind on an especially scary kind of debt: income taxes. If those taxes haven’t already turned into tax liens on your home, preventing that from happening is really important. It can make the difference between discharging and paying nothing on the tax or having to pay it in full.
One scary aspect of tax liens is that, unlike judgment liens, it’s hard to predict when they will hit. Being in a mortgage payment forbearance arrangement with your mortgage lender will not stop the recording of a tax lien.
However, filing bankruptcy does stop the IRS and your state from recording an income tax lien against your home. Section 362(a)(4 and 5) of the Bankruptcy Code. You can discharge older and otherwise qualifying income tax debts under either Chapter 7 or 13. While your bankruptcy case is ongoing, the IRS/state can’t record a tax lien. Furthermore it can’t do so after the tax is discharged because the tax debt is legally gone.
So, your bankruptcy filing prevents the tax from being secured against your home. That would create serious disadvantages for you. Depending on the equity in your home, most likely you would have to pay that tax in full, or at least in part. Thus, it’s usually much, much better to file bankruptcy before the recording of a tax lien.
4. Pay Off an Income Tax While Protecting Your Home
But what if your income tax debt is not old enough to qualify for bankruptcy discharge?
You can do two things.
File a Chapter 7 case to discharge all or most of your other debts. Then you can better afford to pay the tax. If you enter into a payment plan with the IRS/state after the Chapter 7 case is over other efforts to collect that tax are usually put on hold.
Or file a Chapter 13 case through your bankruptcy lawyer and pay the tax through its payment plan. Section 1322(a)(2) of the Bankruptcy Code.
This has extra benefits. Under Chapter 13 you pay the tax based on a more sensible budget compared to the IRS/state’s more aggressive one. The payment plan gives you 3 to 5 years to pay off the tax. You can delay paying on the tax while you pay more important debts–such as catching up on your mortgage. You almost never pay ongoing interest and penalties, potentially saving lots of money. During the case the IRS/state can’t record a tax lien against your home. Finally, it can’t record a tax lien after you finish your case because by then you’ll have paid off the tax.
You end up with a great way to catch up on your income taxes, while keeping your home protected.