Bankruptcy gives fresh starts to distressed debtors. But it uses the least restrictive means to accomplish this goal. Property rights are sacred to many people in America, and that includes a contract between a debtor and a creditor. So, bankruptcy does not interfere with that contract.
Instead, a bankruptcy discharge removes the debtor’s legal obligation to repay debt. It does not affect the collateral consequences. Assume a judge discharges past-due university tuition. The school cannot do anything to collect the amount owed. However, it can withhold the student’s transcript until the debt is paid or otherwise resolved. A bankruptcy judge does not have the authority to order the school to release the transcript.
Bankruptcy works the same way with regard to liens. Even if the judge discharges the debt, the lien remains behind.
Bankruptcy also improves your bargaining position when it comes to liens. Creditors know that their hands are completely tied when it comes to debt collection. So, they are often willing to make deals if a lien is involved. That bargaining works a little differently when it comes to tax liens, as outlined below.
The Automatic Stay in Minnesota
Section 362 of the Bankruptcy Code applies to the pre-lien process. In most cases, a moneylender must file suit to obtain a lien or at least give notice before filing paperwork. Typically, bankruptcy halts the lawsuit process, along with:
- Wage garnishment,
- Foreclosure, and
- Bank account levy.
A lien is different from these other types of adverse actions because a lien is passive. Property and personal liens are essentially meaningless unless the debtor tries to sell the property or applies for a loan. Even then, the debtor has considerable bargaining power. That’s not the case in something like repossession. The creditor has the collateral and therefore all the bargaining power.
Some Minnesota bankruptcy lawyers do not negotiate with creditors outside bankruptcy. But at Kain & Scott, we help you maximize your fresh start. So, we often negotiate with creditors outside and inside bankruptcy. The latter involves a special procedure.
Bankruptcy Mediation in Minnesota
If there is a legitimate dispute as to the amount or legality of the lien, bankruptcy helps here as well. Most bankruptcy judges order such debt disputes to mediation. In this forum, the moneylender has a duty to negotiate in good faith. “Pay what I say you owe and pay it on my terms” is not negotiating in good faith.
Mediation has a high success rate, so it’s often used in situations other than liens. Home mortgage modifications are a good example. Banks often deny applications based on minor technicalities, like a few tenths of a point on a debt-to-income ratio. That does not fly in bankruptcy mediation.
Tax Debt in Minneapolis
A lien is often the collection tool of choice for the Minnesota Department of Revenue and the IRS. Usually, these agencies do not have to go to court or even provide notice before they file liens. Tax liens illustrate how all areas of bankruptcy come together to help consumers in these situations.
- Discharge: If the income tax debt is at least three years old and you filed the returns at least two years ago, the debt is dischargeable if it has not been assessed in the last eight months. Although pre-petition liens still exist, the IRS or MDR often takes pennies on the dollar to remove them. Since the debt is discharged, a settlement is the only way they will ever get money.
- Mediation: It is not easy to negotiate with taxing authorities without an attorney. A lawyer levels the playing field. Sometimes, an attorney can negotiate a deal like upfront lien removal in exchange for a few monthly payments.
- Post-Bankruptcy: Even if the tax debt is not discharged, the taxing authority now knows that the debtor is on shaky financial footing. That knowledge often gives an attorney an edge in post-bankruptcy lien removal negotiations.
At Kain & Scott, we can assist with other non-bankruptcy forms of tax relief, such as the innocent spouse rule or an installment agreement.Bankruptcy does not remove liens, but it makes them much easier to deal with. For a free consultation with an experienced bankruptcy attorney in Minneapolis, contact Kain & Scott. We have nine offices in the area.