Local governments depend on real estate tax revenues to pay for schools and county services.  County governments do not collect income taxes, and sales tax revenues tend to be unsteady.  Real estate tax revenue is stable and it is the lifeblood of school districts and county government in Nebraska.

So when a property owner fails to pay their tax, the County Treasurer sells Tax Certificates to investors for the unpaid taxes. Investors receive 14% interest on the tax lien certificates. If the property owner does not pay the tax and associated interest within 3 years, the investor may take ownership of the property by applying for a Treasurer’s Tax Deed or, in the alternative, the investor may file a lawsuit to foreclose its lien.

TAX DEEDS CONVEY TITLE FREE AND CLEAR OF LIENS

Until a few years ago it was commonly believed that an investor who obtained title through a Tax Deed received the property subject to the mortgages and liens of record.  However, in a series of mind-blowing opinions, the Nebraska courts have ruled that recipients of a Tax Deed acquire title FREE AND CLEAR OF LIENS!

These opinions came as a complete surprise to most attorneys in Nebraska, including attorneys specializing in real estate law. From an investment point of view, this is amazing. The purchase of a single tax certificate of $3,000 could yield an investor ownership of a home worth $100,000 free and clear of liens if the homeowner fails to redeem the certificate within the required time. One tax certificate investor shared with me that he acquires title in about one-third of his investments.

ALWAYS PAY THE OLDEST TAX YEAR FIRST

If you owe delinquent property taxes, remember that you have 3 years to redeem the tax certificate before an investor may apply for a Tax Deed.  For this reason, you always want to pay the oldest tax year first.

PAYING REAL ESTATE TAXES OUTSIDE OF BANKRUPTCY

The county treasurer will not accept monthly payments on delinquent taxes.  The entire tax year must be paid in one payment.  You do have the right to pay one year at a time.

PAYING PAST DUE REAL ESTATE TAXES IN BANKRUPTCY

Chapter 13 bankruptcy plans allow a homeowner to pay delinquent real estate taxes over a 3 to 5 year monthly payment. Once a Chapter 13 case is filed, all foreclosure activity must stop, including actions taken by a tax certificate holder. This is a key advantage to paying taxes through a Chapter 13 Plan.  The bankruptcy court forces the county treasurer to accept small monthly payments instead of requiring an entire year of taxes to be paid at once.

RECOVERING A HOME LOST TO UNPAID REAL ESTATE TAXES

May a homeowner recover a home after a Tax Deed has been filed?  There are several cases in bankruptcy courts allowing a homeowner to recovery a home lost to a tax deed, but there are no opinions in Nebraska yet.  See this article.  However, it appears that a homeowner may be successful in such an action if they file Chapter 13 and ask the court to set aside the sale within 2 years.

Image courtesy of Flickr and JacobRuff.

 

 

 

India

Here is the advertisement spam in today’s inbox:

Published by Actuit India on 20th January 2008

Hire Bankruptcy Petition Preparation Services

Since 2008 Actuit has a disciplined team of paralegals to help your bankrutpcy practices. Our digital outsourcing process make sure that team is efficient with your time and you get the best of the outsourcing experience. We make sure that you get benefited from the highest quality system design we have to offer. So that each new client experiences the best that our offshore expert paralegal has to offer

We do limit the number of clients handled by each team.

Save time to manage your bankruptcy practice, spend less & watch your practice grow while we work as your paralegal back office form New Delhi, India.

Is that how you want your bankruptcy case prepared?  Do you want your most personal financial information stored on computers located in India or China?

There is a lot of economic incentive for lawyers to outsource this service:

  • Outsourcing removes the number one overhead cost of most law firms: employee wages.
  • Outsourcing transforms paralegal costs from a fixed overhead item to a variable cost expense.
  • Outsourcing means you need less office space, so you save on rent.
  • Paralegals in India do not receive overtime.
  • Payroll tax burdens are eliminated with overseas outsourcing.  It eliminates the need to file quarterly reports with the IRS.
  • The burden of hiring and firing is eliminated.

I’ve never outsourced my paralegal staff.  I doubt I ever will.  Why not?

For starters, I have found the cost savings illusory.  Sure, I can outsource the labor cost of preparing a bankruptcy petition for maybe $100 to $150 per case.  But outsourcing has many drawbacks.

  • Quality Suffers.  Workers in India simply do not understand life in America (and we don’t fully understand their life either). When you don’t understand your client fully, how are you to ask the client questions to fully explain their financial situation to the court? Paralegals from India are probably fine technicians, but they don’t get the culture and they do not have the experience to explain and document my client’s financial situation.
  • Communication Problems.  I believe that one attorney and one paralegal should be assigned to each client. You speak to the same team every time you call our office.  You know your attorney/paralegal team and they know you. They know your kids names and your favorite football team and a million other details about your family. Bankruptcy cases can last for up to 5 years. That’s an important relationship.  Because we know you better we can serve you better.  Do you think a worker from India can match that?
  • Cost Savings are Illusory.  It may cost less to outsource case preparation, but knowledgeable workers save money in other ways. By providing one-on-one interaction with clients, they perform their job better and that leads to more client referrals. They do their job more efficiently because they have a fuller understanding of the client’s background.
  • Protecting Confidential Client Information.  Bankruptcy attorneys gather a lot of personal information, including tax returns, paycheck stubs, bank account statements, retirement statements, etc. You want that information stored on some computer in India?

It’s one thing to have a car part or a computer chip manufactured overseas.  As a consumer I benefit from the cost savings.  But when it comes to legal services, the push to outsource work is inherently risky.  When I hire a local attorney I don’t want my file sent overseas.

Sam Turco Law

Proudly Made in America

 

Image courtesy of Flickr and Juan Antonio F. Segal

 

 

Getting on the Same Page

When you tell your spouse you want to chat about the family budget, the translation is that you want to have a fight. Understand that reaction and plan for it. Don’t expect to agree on a budget in one day. This is a process and it requires trust and patience.

Divide & Conquer

To “budget” means to “divide.”  Budgeting means dividing your money.  Divide into what?  Well, the most famous method is the use of envelopes.  We have all seen this—putting cash in to separate envelopes with labels like “rent” or “mortgage” or “car payment” etc.  The more modern version of this is to use separate bank accounts that are funded on payday with specific spending missions.  Fund separate bank accounts on payday to pay your priority expenses first.

Payday  Action Plans

The term budget is too vague.  A better description is Payday Action Plan.  Literally, what is the plan of action on payday?  How is the paycheck to be spent?  The essence of budgeting is to plan in advance how every dollar of the paycheck is spent.  A budget is not a list of numbers on a sheet of paper.  It is an action, not an idea.  Money must Move according to a Plan for there to be a budget in existence, otherwise a budget is nothing more than cheap talk.

Emergency  Savings

Bad stuff happens, always.  Over time your budget should cause you to save 3 to 6 months of your living expenses in cash.  That’s going to take time to save, so your paycheck-to-paycheck spending plan must provide for holding back some of your money for a rainy day.  Fund your savings account every payday.  At a bare minimum, you need $1,000 in savings right now!

The Importance of Payday

Here is a sad fact.  You are not going to win the lottery or inherit lots of money.  Your entire financial life is based on that lousy paycheck.  That’s it.  What you do or fail to do on payday determines your destiny.  In a nutshell, that is the secret to money.  If you save money each payday and execute a spending plan, your plan will materialize.  If you are unfocused on payday and pay a bill here and a bill there without a master plan in place, you are just wandering in circles.  If your working career spans over 30 years and you are paid twice a month, you have 720 paychecks in your life.  What do you have to do 720 times in a row to achieve your goals?

Long-Term Goals Are Important

Where do you want to be in 20 years?  It is important to know this in great detail.  Exactly what do you want your financial life to look like in 20 years?  When forced to think about this, most people say they want their mortgage paid off and they want enough money saved in a retirement account so they can slow down and enjoy life.  They want to be free from financial stress.  Once you know the long-term goal, then you can figure out the action you must take every payday to make that happen.  Want to pay off a $100,000 in 15 years instead of 30?  Then you need to know how much more a paycheck that requires.  (Hint, the difference is usually less than $50 per paycheck.)  Knowing where you want to be tomorrow influences what you do today.  Having specific—very darn specific—long-term goals is essential.  Write them down now.

Priorities

You Need a Top-Ten List:  Some expenses are more important than others.  Paying rent is more important than paying the cable bill.  Car payments are more important than dining out. Yet, I keep seeing people who are 8 payments behind on their mortgage despite the fact that they have good paying jobs and have not been unemployed.  What happened?  When I review their bank statements I see what happened.  No spending priorities are present.  They spend hundreds of dollars each month on restaurants and clothing and cell phone services, but the mortgage was not paid?  Why?  Because all their money went into one bank account and when it was time to pay the mortgage the account was drained.  This is especially true when married couples armed with debit cards slash the bank account fund throughout the month before paying the really important bills.  Here is a clue:  Never let your mortgage money sit in the same account that is used to buy groceries, gas, movie tickets etc.  Some bills are more important than others.  Write down your 10 most important monthly expenses (i.e., your Top Ten List).  Add up the list.  Then, figure out how much of each paycheck you must deposit into a separate bank account so that enough money is on hand at the end of the month to pay these bills.  Ideally, use direct deposit to have that portion of the paycheck put into this new account.   Then, use your bank’s automatic Bill Pay service to automatically pay these Top 10 bills each month.  It’s a simple system.  Money automatically gets deposited into the new account each payday.  Money is automatically paid out each month by the bank.  This is the power of dividing your money.  This is the power of prioritizing your spending.  The first money you earn goes into the Top 10 List bank account, and the remainder goes into the pour-over account used to pay for day-to-day living expenses.  Prioritize your money.  This is the essence of what it means to “budget”.

Short-term Rewards are Important, Too

Nobody is going to stick to a diet that is all celery and no cake.  You need a cheat day to reward yourself for eating right during the week.  Your money needs to have some fun as well.  So, while you are setting up a bank account to achieve long-term goals and to pay your Top 10 priorities, remember to set up an account to reward good behavior. Want to buy a $500 big-screen television in 6 months?  By all means, fund that toy to make it happen.  There is a powerful psychological change that occurs when your brain figures out that it will be rewarded in the near future with neat toys when a payday action plan is followed.  Small victories lead to greater wins.  Self-destructive behavior occurs when you feel like you are going to lose no matter what, but when you see quick rewards for buying into a program, you are less likely to veer off course.   Budget for fun stuff and vacations and trips.  We are wired to respond to rewards.

Image courtesy of Flickr and Francesco

 

UNLV law professor Nancy Rapoport asks a series of questions in her latest article published in www.ConsiderChapter 13.org.

faculty_Rapoport_NancyTo what extent must a debtor’s attorney personally meet with the client prior to filing the petition on behalf of the client, and how meaningful should the meeting be?

More specifically, how much can the attorney safely and ethically delegate to non-lawyer staff: Intake interview? Filling out forms? Obtaining and reviewing documents like mortgages and paystubs? Telling the client that s/he needs to file chapter 7 or 13? Telling the client what the attorney’s fee will be and getting the client to sign the retainer agreement? Going over the petition and schedules with the client and getting the client’s signature? If the attorney is reviewing the non-lawyer’s work along the way but does not personally meet or talk with the client, is that adequate supervision? What if the only contact the attorney has with the client prepetition is one “facetime” or skype video call, but the non-lawyer assistant does everything else?”

Let me answer the first question very directly: An attorney must substantially communicate with a client prior to filing a bankruptcy petition.  In fact, the communication must be more than just chatting about filing a petition. It goes much deeper than that.  Should the client even consider filing bankruptcy as opposed to some other debt solution, like consumer credit counseling or debt settlement or lifestyle downsizing?

Beyond the discussion of which debt solution is best for the client, it is important for the attorney to figure out the real cause of the money problem. Financial problems are often secondary to a more general personal or family problem.  I may have two clients with identical financial problems but may recommend completely different courses of action based on their personality, education level, age, physical condition, emotional issues, etc.  You must understand the client before you can really understand their financial problem.

Having said that, I am a big believer in building high quality systems of practice.  Delegating tasks to paralegal staff is essential.  In fact, to be unable to delegate is in its own way failing the client.  If an attorney cannot return phone calls because they are too busy doing clerical tasks that could and should be delegated, that is a problem.  Building standard operating procedures driven by checklists and attorney review procedures benefits clients.  Having a paralegal staff trained to think as lawyers and who can respond to client requests quickly is appreciated by clients. Systematically training of staff on all parts of the bankruptcy process is at the core of building a great firm. Delegation is not the problem.

Bankruptcy practice is susceptible to machine-driven operation for many reasons.  Bankruptcy petitions are prepared on standardized federal forms. The process is basically the same from state to state since it is a federal law that plugs in local state exemptions that are very similar, so forming firms that operate in multiple states is common.  Most bankruptcy firms utilize the same computer software packages as well, so the work performed by an attorney or paralegal in New York is almost exactly the same as those who work in California.  Client management software and cloud computing and internet-based telephone systems increasingly allow attorneys to expand geographically. The Matrix is real.

The problem is not caused by staff delegation or the use of technology.  The problem associated with diminishing attorney-client contact is decisional.  The attorney either decides to stay connected to the client or they decide to bum off the job to staff and technology.  You decide to be accessible or you do not. You can build a system either way.

I’ve chosen to build a firm that uses every ounce of talent my staff has and to utilize technology to help us achieve our mission, but to require that each client has a personal relationship with their attorney and their paralegal.  That’s an expensive way to build a bankruptcy practice.  Good paralegals are not cheap and they tend to be sassy.  Great attorneys take years to train and they leave unless they are provided with proper compensation and a sense of self-control.

It’s a lot more profitable to build a bankruptcy mill on cheap labor and technology, but invariably those firms at some point blow up at some point.  They thrive for a while but eventually collapse.

Communicating with clients exclusively over the telephone, Skype, Facetime, or video conferencing is all fine.  The medium does not matter.  It’s the attorney’s commitment to professionalism, caring and the client that matter in the end.  Clients know when they matter. They know when calls are returned, emails are answered, and when the attorney fusses over details.

I think Nancy’s point is that attorney contact with the client must be continuous throughout the case and that some firms are limiting that contact a a quick 10-minute sales consultation.  I could not agree more.

 

Banker

Debt settlement is often a better debt solution than filing bankruptcy or enduring a multi-year consumer credit repayment program, especially when liquid funds are available to fund the settlement.  Although the vast majority of people I meet with debt problems are not good candidates for debt settlement, those who can tap into a lump-sum of cash by selling assets or liquidating investments may look at debt settlement options.

Should you consider debt settlement?

My general rule that you should not consider debt settlement unless you have have at least one-third of the account balances owed on hand in cash within 6 months of stopping payments to creditors.  So, if you owe $30,000 of credit card debt, do not consider debt settlement unless you can have at least $10,000 of than saved in cash within 6 months of stopping payments on the credit cards, and you will need to add more to the pot each month until you have 40% to 50% of the account balances saved in cash. If you cannot do that do not try debt settlement.  Most credit card companies will settle the account for roughly 40% of the account balance, but they want that settlement in cash in a lump-sum payment.

#1:  Stop paying the accounts.

If debt settlement is your best option, the first step is to stop paying the accounts.  Credit card companies do not negotiate settlements unless the account is in default.  Once an account has become 4 to 6 months delinquent, the creditor is generally willing to cut their losses and settle the account.

#2:  Call the creditors.

Once you stop paying the account, the next step is to reach out to the creditor and request a settlement.  Debt settlement companies say they know secrets and tricks that credit card companies don’t want to tell you about settling debts.  That is hogwash!  There are no secrets.  Just pick up the phone and call.

#3: How much should you offer?

Chances are, when you call the creditor you will be speaking to a poorly paid customer service representative who is just reading a script off their computer screen.  There is no real negotiating going on here.  Credit card companies have settlement standards and the employee on the phone can only accept what they are authorized to accept.  They are not going to look at your individual circumstances–they just don’t have the authority.  You are talking to a machine.  By all means, offer them a low settlement, perhaps 25% of the balance, but most likely they will counter at 40% to 50% of the account balance.  If you don’t like the offer just say goodbye and call back the next month.

#4:  Account balances grow larger each month.

Each month the account becomes older the balance becomes larger, especially as the late payment fees and default interest rates kick in.  So, although you may settle the account for 40 cents on the dollar at some point, the savings is diminished since you are settling a larger account balance.

#5:  Never pay a settlement without a settlement letter in hand.

Never pay a creditor a dime until they send you a settlement letter stating that they will accept X amount of dollars in full satisfaction for the account balance.  No letter, no settlement.

#6:  Settlement deadlines are false.

Debt collectors will constantly tell you that the settlement offer will expire by a certain date.  Don’t believe them.  That same offer you have today will be there next month.  The truth is that debt collectors are paid on commission and they must submit monthly performance reports to their employers. They more they collect the more they get paid. They will try to trick you into believing that you will not get the same offer next month and that you will have to pay more to settle if you do not accept their offer by their deadline.

#7: Never pay a settlement with a Check by Phone.

I never pay credit card collectors over the phone.  Never give anyone access to your bank account.  Instead, get a Cashier’s Check from your bank and send it to the collector by Certified Mail or by some other tracking service such as FedEx or UPS.

#8:  Time is Limited.

Once an account is six months delinquent, credit card companies start selling the accounts to aggressive junk debt buyers who are quick to file collection lawsuits.  In some cases credit card companies will actually file a collection lawsuit once the account becomes more than six months delinquent.  Once litigation commences the rules of the game change. Now there is a litigation attorney in charge of your account, and that person may see that you have equity in your home or know where to garnish your paycheck.  It is best to settle all the accounts before litigation begins.

#9:  There may be tax consequences to settling debt.

When you settle a debt for less than what is owed, the creditor may send you and the IRS tax form 1099-C for the amount of debt you did not pay.  For some people this will become taxable income and for others it will not.  Read this article for more information on that topic.

#10:  Know when to hire a Pro.

The fact is, we can settle debts better than you. We can settle them faster and for less money that you can.  Creditors know that when they reject our settlement offers we may hit them with a bankruptcy case and then they get nothing. We know how to drag out the process and wear down collectors. We deal with their attorneys every day and know how to cut through the red tape to get settlements done quickly.  If an account has gone to litigation, it’s time to call the a debt settlement professional.

Image courtesy of Flickr and Carl Wycoff.

 

4101312499_9f0e31d410_b

The Home Affordable Modification Program (HAMP) expired December 31st.  After eight years of assisting underwater homeowners save their homes from foreclosure, the program has now ended.

Approximately 10 million homes were lost to foreclosure in the past decade.  HAMP helped lessen the mortgage meltdown, but its job is now complete.  Foreclosure sales have diminished and home prices are now almost equal to the market prices just prior to the housing market bubble bursting in 2008.

So now what?

According to the folks I chat to in the foreclosure industry, expect mortgage service companies to tighten standards and foreclosures to gradually increase during 2017.

Without HAMP, homeowners seeking loan modification will be left at the mercy of lenders.”  Dillon Graham, Florida foreclosure defense attorney.

The Consumer Financial Protection Bureau has issued lending guidelines to help reduce the number of foreclosures in the future, including an emphasis on loan affordability, but those guidelines will do little to help current homeowners who fall behind on their mortgage payment.

I expect to see a new foreclosure trend emerging in 2017:

  • Banks will be quicker to initiate foreclosure actions when a homeowner falls 2 to 3 payments behind.
  • Foreclosure Forbearance Agreements will emerge from an 8-year hibernation and be the primary loss mitigation tool offered by mortgage lenders.
  • Chapter 13 bankruptcy case filings will increase as it provides the the best option to give homeowners 3 to 5 years to cure delinquent mortgage payments.
  • Foreclosures on long-forgotten 2nd mortgage debts will pick up as surging home prices enable banks to recoup some recovery for loans previously underwater.

This cat is now away.  Time for the mice to play again?

 

Image courtesy of Flickr and frankieleon.

It’s tax refund season again, and if you are considering filing bankruptcy there are some really important things you need to know about that long- awaited refund.

#1: Never Use Tax Refunds to Repay Family Loans:  

Do not use that tax refund to repay family loans.  You must report every payment made to a family member within one year of filing bankruptcy. Family members are considered “insiders” under the bankruptcy law, and such payments may be recovered by the bankruptcy Trustee.  In other words, if you pay back a loan to a family member within a year of bankruptcy, the court trustee can sue that person to recover the money.

It is normal to use a tax refund to pay back family loans, and there is nothing illegal about such payments.  However, when you file bankruptcy the law tries to make sure that some creditors, like family members or business partners, are not unjustly favored just before the case is filed while other creditors go unpaid.  So, bankruptcy law empowers the Trustee to void such “preference” payments.

The solution to this problem?  Pay relatives after the bankruptcy is filed, never before.

#2: Only So Much of the Tax Refund is Protected:

There are two Nebraska exemption laws that protect tax refunds:

If you are anticipating a tax refund of more than these protected amounts, then it may be wise to not file the bankruptcy until after the tax refund is received and spent. It is common for our firm to recommend that clients wait until after the tax return is received before they actually file the bankruptcy case.

#3:  Tax Refunds are Pro-rated During the Year

Those folks who file bankruptcy in the months of October, November and December may find that the Chapter 7 trustee will claim a pro-rata share of their upcoming tax refund.  For example, if you anticipate receiving a $6,000 tax refund and you file a bankruptcy case on October 31, the Chapter 7 trustee may claim 83% of your tax refund since that much of the calendar year has expired.

#4:  Be Prepared to Explain How You Spent the Tax Refund

If you receive a large tax refund shortly before filing bankruptcy, be prepared to explain how you spent the refund. How did you spend that $6,000 refund you received a month prior to filing bankruptcy?  The Chapter 7 Trustee will likely ask that question at the court meeting that occurs a few weeks after the bankruptcy is filed.  Write down a list of how you spent the money.  In fact, a good bankruptcy attorney should actually provide this information in the bankruptcy schedules.  You would be amazed at how many debtors get nervous at the hearing and confess that they repaid family loans or transferred money to their fiancé to “hold” until the bankruptcy is over.  This should never happen–never!  Yet, cheap bankruptcy attorneys routinely and lazily fail to anticipate the obvious questions a Trustee may ask and their clients wind up losing their refund for no good reason.

#5:  The IRS May Seize Your Tax Refund

Do you owe the IRS money?  If so, they have the right to take your tax refund even if you file bankruptcy.  However, special rules apply.  Generally, individual income taxes are discharged in bankruptcy if the return was filed and if it became due more than three (3) years before the bankruptcy was filed.  For example, if you owe $10,000 for income taxes owed in the year 2012 and the return was filed by the normal due date of April 15, 2013, that tax will be discharged in bankruptcy filed in 2017.  So, if you are owed a $6,000 tax refund for tax year 2016 and you file the bankruptcy on December 31, 2016, you will receive the tax refund.  However, if you file the bankruptcy on January 1, 2017, you will lose the tax refund because the IRS has the right to offset.  In both cases the underlying $10,000 tax debt owed for 2012 is discharged, but the offset right does not materialize until you have a right to the refund.  The right to the 2016 refund does not exist until January 1, 2017.  One day makes the difference.  Your bankruptcy attorney should understand this key timing issue, but many do not.  Choose your bankruptcy attorney carefully.

Image courtesy of Flickr and Images

Tax Lien

The existence of a Federal Tax Lien in a Chapter 7 bankruptcy case is a dangerous thing. Especially in cases where a debtor has substantial equity in a home or other assets.

Why are tax liens so dangerous?  Because property exemption laws, such as the Homestead Exemption, do not apply to federal tax liens.

Exemption laws protect a debtor’s property when they file bankruptcy. For example, the Nebraska Homestead Exemption protects up to $60,000 of home equity (the difference between the home’s value and the balance of the mortgage).  So, if a debtor owns a home worth $100,000 and the home is subject to a mortgage loan of $40,000, the home is generally protected in chapter 7, unless a federal tax lien is present.

What is alarming is that most bankruptcy attorneys seem to be oblivious to the fact that federal tax liens are not subject to state exemption laws.  In fact, I have spoken to attorneys who falsely believe a federal tax lien actually protects a home since the lien takes away the home equity.  Yes, the lien takes away equity, but it also puts a mighty power in the hands of the Chapter 7 Trustee.

What drives this dangerously false idea of a tax lien protecting property is that few attorneys have witnessed a bankruptcy trustee use the power of bankruptcy code Section 724(b).  I’ve never seen a Nebraska trustee tap the power of 724(b), nor is there any case I’ve seen in Nebraska where a trustee took away a home with this power. Yet, cases exist in other jurisdictions where debtors have lost homes due to the trustee’s use of 724(b).

Martin and Elvira Laredo owned a home in Illinois valued at $320,235 that was subject to a mortgage loans of $245,000.  They owed the IRS $282,268 and reported that a federal tax lien was filed against their home.  The debtors claimed a $15,000 homestead exemption.  In re Laredo, 334 B.R. 401 (2005).  The Chapter 7 Trustee motioned the court for a ruling to determine that the homestead exemption was subordinate to the federal tax lien and the administrative expenses the trustee would incur in selling the home.  The court agreed with the trustee and ordered the home sold even though the only parties who benefited were the IRS and the Trustee.

This result should not surprise bankruptcy attorneys.  Those who represent debtors in Chapter 13 cases should be aware that the IRS will file a secured claim on exempt property when federal tax liens are present.  So, why would the result  in a Chapter 7 be any different?  In theory, the payments to creditors in Chapter 13 should be no less than payments made in Chapter 7 under what is known as the “best interest of creditors test“, so this result should  not be surprising.

At least one Nebraska case has spoken to the power of 724(b), In re Netal, Inc., Case #09-82992.

I suspect the reason we do not see Chapter 7 Trustee’s use the power of 724(b) more is that although the bankruptcy schedules may report that federal tax debts are present, they debtor may not be reporting that a federal tax lien has been filed prior to the bankruptcy.  The debtor’s attorney may also be unaware of the presence of the tax lien unless they perform a public records search.  However, given the duty of a bankruptcy attorney to perform a “due diligence” investigation of the debtor’s assets, income and debts, there is probably a duty to search for and report the existence of such liens.  Also, unless the Trustee seeks out independent confirmation of the existence of the lien, he or she may be ignorant of its presence.  A smart trustee should assume the presence of a tax lien when substantial tax debt is reported even if the lien itself is not disclosed.

A second reason for the lack of 724(b) seizures in Nebraska is the lack of prior history of using this tool.  There is no tradition of 724(b) property seizures in Nebraska, but I suspect that tradition will change over time, especially in a rising housing market.

In conclusion, when substantial tax debts exist, be careful when filing Chapter 7.  Choose your Nebraska bankruptcy attorney carefully.

 

 

 

 

 

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Federal tax liens present special problems in bankruptcy cases, especially in chapter 7 cases where a debtor has equity in their home.  Tax liens in chapter 7 cases can be very dangerous.  That is because the IRS is not subject to the protections afforded by Nebraska exemption laws.

Exemption laws  protect the equity in a debtor’s property.  For example, the Nebraska Homestead Exemption protects up to $60,000 of the equity in a person’s home.  (Value – Mortgage = Equity).  So if a home is worth $100,000 and it is subject to a $40,000 mortgage, the $60,000 of equity is protected by the homestead exemption. Unless . . . . a Federal Tax Lien is present.

The scary part of this is that most bankruptcy attorneys are completely unaware of this danger.  Why?  Because they have never seen a Chapter 7 trustee claim exempt homestead equity.

tax-lien-example

Bankruptcy Section 724(b) gives the Chapter 7 Trustee the power to utilize a tax lien to liquidate property that they would normally not be able to attack.  State exemption laws do not apply to federal tax lien.  Federal law trumps state law.

Martin and Elvira Laredo found out the hard way how federal tax liens an destroy a chapter 7 case.  The Laredos owned a home valued at $320,235 subject to a first mortgage lien of $224,971 and a second mortgage of $25,000.  The debtors claim a homestead exemption to protect their $70,264 of homestead equity.  They also reported owing the IRS $114,842 and that a Federal Tax Lien had been filed with the county deeds office.

The Chapter 7 Trustee exercised the power of §724(b) and sold their home for $380,000.  The bankruptcy court cited a long list of cases and statutes allowing the trustee to utilize the power of the tax lien normally reserved to the IRS.

Even though the homestead might be exempt under state law from the claims of private creditors, ‘no provision of a state law may exempt property or rights to property from levy for the collection of’ federal taxes owed. See United States. v. Estes, 450 F.2d 62, 65 (5th Cir. 1971).

The power granted in 724(b) allows the bankruptcy trustee to use the secured tax lien powers to benefit other administrative and priority creditors of the estate.

Section 724(b) permits a Chapter 7 trustee to liquidate property subject to a tax lien and to distribute the proceeds to priority claimants before making any distribution to taxing authorities.

The only parties affected by the operation of 724(b) are the priority claimants and the tax lien creditors.  General unsecured creditors do not benefit from this provision.  However, remember that the fees of the Chapter 7 Trustee is a priority claim itself, so a trustee may be disposed to exercise this power for no other reason than to pay his or her trustee commissions. The IRS is normally fine with this result even though their share of the proceeds is reduced since the sale of a home results in some payment of the tax debt.

Is the tax lien problem limited to debtors with substantial home equity?  

No, the tax lien problem in chapter also extends to personal property.  If a debtor owns substantial equity in vehicles, retirement accounts, life insurance policies or other personal property, the tax lien can have the same devastating result.

Is filing Chapter 13 a safer response to the presence of federal tax liens?

As a general rule, chapter 13 is always a safer bankruptcy choice. The bankruptcy trustee in chapter 13 is not empowered to liquidate assets.  However, the IRS will file a secured Proof of Claim for the value of its tax lien in a Chapter 13 case.  So, if a debtor has $20,000 of equity in a home and the IRS files a secured bankruptcy claim, the secured portion of that claim must be paid in full.

The bottom line is that tax liens are dangerous in bankruptcy cases.  Many attorneys fail to investigate if a tax lien accompanies a tax debt, and good attorneys are always seeking out the possible existence of a lien.  Federal tax liens are filed in the county Register of Deeds office, so this is a matter of public record that can be verified.  Avoid hiring cheap bankruptcy attorneys who skip over this important public record search.

Image courtesy of Flickr and John Morgan.

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Bankruptcy Code Section 523(a)(6):   A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.

A federal jury has awarded $28.1 million to six plaintiffs (the “Beatrice 6”) for a reckless investigation and manufacturing false evidence conducted by the Gage County Sheriff’s department. The plaintiffs spent 20 years in prison for the 1985 rape and murder of Helen Wilson, but DNA testing conducted in 2008 revealed that the murder was actually committed by another individual, Bruce Allen Smith.

Following their release from prison, the plaintiffs brought suit in Nebraska federal court for the Sheriff Department’s building a case on coerced false confessions.

As a result of this judgment, Gage County has recently signed contracts with law firms to possibly file a Chapter 9 bankruptcy case.  Insurers for the county have denied coverage.

The interesting  and somewhat unusual aspect of this potential bankruptcy case is that Gage County was not in any financial distress prior to the entry of this judgment.  The bankruptcy is contemplated for the sole reason of denying payment to victims of the County’s intentional wrongdoing.

Generally, damages sustained due to “willful and malicious” injuries are not dischargeable under bankruptcy code Section 523(a)(6), but that provision of the law does not apply to Chapter 9 cases involving municipalities and public subdivisions.

So, Gage County may file bankruptcy for the sole purpose of denying payment for the intentional, willful and malicious damages inflicted on the Beatrice 6.

Although the judgment may be subject to discharge, there is certain to be objections to any plan of reorganization filed that proposes to pay less than the full court judgment.  The county still must prove it’s reorganization plan is filed in good faith and that it cannot propose to pay the entire judgment.  In the Detroit, Michigan bankruptcy case it was apparent that the city could not tax itself into solvency, but what about Gage County?  Could the county structure full payment of the judgment if the county raised real estate taxes?  By what percentage would the levy have to increase to pay the judgment?

Gage County has land valued at $3 billion in 2015 according to the Nebraska Department of Revenue.  The county collected $9 million in real estate taxes last year on a levy rate of 29.7 cents per $100 of land value.  Paying the entire $28.1 million judgment in one year would be impossible, but what about paying off the debt over 10 to 20 years?

If paying off the debt in full over 10 to 20 years is possible with only a modest increase of the tax levy, why would a bankruptcy court enable taxpayers of Gage County to avoid this obligation in a Chapter 9 plan regardless of whether the debt is subject to discharge?  How would that type of bankruptcy plan meet the burden of proposing a plan in “good faith?”

It should be an interesting year in Nebraska bankruptcy court for 2017.

 

 

Image courtesy of Flickr and Dave Nakayama