Tax liens usually aren’t good things. But in at least one situation, they can help someone save their home in bankruptcy.
In those states, such as Maryland, that do not have unlimited homestead exemptions, bankruptcy attorneys often have to deal with clients who own real estate that has non-exempt equity. This equity can be a problem, requiring either large payments through a Chapter 11 or Chapter 13 under the “Chapter 7 Liquidation Analysis Test,” or loss of the property in Chapter 7.
In one recent case, this problem was “solved” through a large state tax lien. The client owned a house that had $60,000 in non-exempt equity. This typically would have resulted in the property being sold in Chapter 7–something the client did not want to occur–or would have required monthly payment in excess of $1,000 in Chapter 13–something the client could not afford. She did have some rather large old state taxes in connection with a long-closed business, and the state had filed a $200,000 tax lien several years earlier. As a result, all of the equity in the house was eaten up by the secured claim of the state on the tax lien, meaning that the client could keep the house in Chapter 7 or make affordable payments in Chapter 11 or Chapter 13, taxes that were not part of the lien could be discharged, and the rest of the tax lien could be “stripped off” the property, leaving only $60,000 in claims to deal with.
The client ended up filing Chapter 7 and worked out an affordable payment plan with the state that started after she got her discharge.
Carolyn Secor is a Clearwater bankruptcy attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg, and the Tampa Bay area.