Cram Down Secured Tax Debt in Chapter 13 Bankruptcy

December 17, 2011

By: David M. Serafin

Receiving a Notice of an IRS Tax Lien can be quite daunting for those looking to get rid of their debt and find financial freedom.  Tax debt is clearly more difficult to eliminate than debt from credit cards, medical bills, or normal collection or garnishments but the filing of either chapter 7 or chapter 13 bankruptcy may provide some debt assistance in keeping the IRS (or State of Colorado) away.

There are generally three categories of tax debt: priority, secured and unsecured.  Tax debt incurred within the past three years is priority, meaning that it cannot be discharged in chapter 7 or 13.  (Priority tax debt can still be paid back interest and penalty free in chapter 13.)  Unsecured tax debt meets all of the elements of discharge (three years old or longer, income tax return filed two years or more prior to bankruptcy and no assessment within past 240 days).  But, other tax debt which otherwise would be classified as unsecured still needs to be paid back if the IRS previously secured its interest – by filing a Notice of Federal Tax Lien in the county where the debtor lives or owns property – before the bankruptcy was filed.   

There is no Cram Down provision in chapter 7 which involves a straight up liquidation of debt and not the reorganization protection allowed by chapter 13.  But, for debtors who pass the Means Test and who would have no reason to voluntarily file for chapter 13, an IRS tax lien does not attach to a chapter 7 filer’s after-acquired property.  So, debtors who do not own a house or other valuable property (to which a tax lien could have otherwise attached) will not normally be affected by the continued existence of a now powerless tax lien.

But, other debtors – with higher income who do not pass the Means Test, property not protected by any Colorado state exemption or a recent chapter 7 filing, etc. – will need to address their mounting tax debt in chapter 13.  For those struggling with overwhelming tax debt and who need chapter 13 debt relief, an otherwise dischargeable tax debt - but for the fact such debt is secured by an IRS Notice of Federal Tax Lien – can still be crammed down to the value of the debtor’s net worth.  Just like with cramming a car loan under Section 506 of the U.S. Bankruptcy Code, cramming down a tax lien not only lowers the tax payable but also stretches the payments equally over the course of the multi-year re-payment plan.     

The problem is that such cram down does not help those who own a house or rental property.  But, for the truly indigent with little to their name, all but a small portion of secured tax debt (attributable to the value of the debtor’s personal property) can be wiped away with the remaining amount paid back over a three to five year re-payment plan after which the lien will be eliminated.

As an Aurora, Colorado debt assistance lawyer assisting those who need tax and bankruptcy help, the Law Office of David M. Serafin will advise as to your options in dealing with an IRS (or State of Colorado) tax lien.  

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