William Kunofsky

William Kunofsky

Monday, June 13, 2011

Surrendering Your Property Can Make Tax Sense in Ch. 13 Bankruptcy

A debtor owing tax for multiple years files a Chapter 13 bankruptcy. The IRS has properly filed a Notice of Federal Tax Lien before the filing of the bankruptcy. The taxes for the earliest years could have been discharged if the lien had not been filed. The debtor owns a home as his main asset and is behind on the mortgage. He does have equity in property. He does not have enough available income to fund the plan. Therefore, the bankruptcy will ultimately be dismissed because it is not feasible.

The Claim of the IRS is secured by the equity in the home. If the debtor surrenders the home to the mortgage company two major changes occur in the bankruptcy. The IRS secured claim for the early years tax debt becomes unsecured. The second effect of surrendering the property is the debtor's budget changes. If the home is replaced with a less expensive apartment there will be more available income to fund the plan of reorganization.

The  debtor would not have been able to cure the mortgage arrears. A large percentage of the debtors available income would have been devoted to the home. The home would have been subject to foreclosure in the future given these facts. Therefore, the surrender of the property is advantageous. You can sometimes change a sows ear into a silk purse!

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