Discharging Income Taxes In Chapter 13 Bankruptcy

As a bankruptcy lawyer I frequently have to inform people filing Chapter 7 bankruptcy that their income tax debts will not be discharged. Income taxes will not be discharged, if less than three years has passed since the due date of the tax return, if less than two years has passed since the actual filing of the tax return, or if the taxpayer made a willful effort to evade or defeat taxes.

Since a chapter 13 bankruptcy  discharges many debts that are not discharged in a Chapter 7 the next question is will the income taxes be discharged in a chapter 13. The answer is yes "sort of."

While a chapter 13 will discharge income taxes one of the rules for a chapter 13 plan is that it will have to pay off 100% of priority debts through the plan. And to make it more complicated, some nondischargeable income taxes are priority debt and others are not.

If it less than three years since the due date of the tax return, the unpaid taxes are a priority debt, and the chapter 13 plan must pay them off in their entirety. However, if the three years has passed, and it is less than two years since the actual returns were filed, or if the taxpayer made a willful effort to evade or defeat taxes, the taxes become general unsecured debts, and the plan merely has to pay the IRS the same percentage that unsecured creditors receive.

Personal Property and The Homestead Exemption

Illinois law allows an individual to exempt up to $15,000.00 of equity in his or her home from claims brought by a creditor. For a married couple owning the home jointly the exemption would go up to $30,000.00. In many cases this provision will allows people who file a Chapter 7 Bankruptcy to keep their home.

One does not necessarily have to own a house or a condo though to take advantage of the homestead exemption. The Illinois Statute provides that the homestead exemption will also apply to personal property provided it is used as one’s principal residence. Thus a couple, who live in mobile home, can protect up to $30,000.00 of the value of the home from creditors provided they own it jointly. The exemption would also apply to a boat, if the owner uses the boat as his or her principal residence.

The wording of the statute in fact covers all personal property, so it could even apply to a car, or a tent, or an airplane. The tricky part once you get beyond mobile homes and boats though, might be to convince a court that you are really using the item of personal property as your primary home.

Exemption of Your Home From Creditors

As a bankruptcy lawyer I frequently have people ask me whether they can stop creditors from taking their homes.

This is not a question where one answer fits all though, and while creditors can sometimes take a debtor’s home, there are a number of factors that will stop this from happening in most situations.

One such factor is the homestead exemption under Illinois law. The law allows you to exempt up to $15,000.00 of your home value from creditors. Or in the case of two people owning a home jointly up to $30,000.00.

While there are not many homes in Illinois that are worth less than $30,000.00 keep in mind that other than when dealing with a mortgage foreclosure you only need to protect your equity in the home. Thus a married couple with a jointly owned home worth $300,000.00 home and a $250,000.00 home should be safe. This is because after subtracting out the mortgage and the cost of selling the home (which would normally be more than $20,000.00 for a home of this value) there is less than $30,000.00 of equity which the homeowners need to protect.

Homeowner Association Dues In Bankruptcy

When an individual files bankruptcy  he or she is frequently behind on mortgage payments and or  homeowner association dues. The amount owed on these particular debts are discharged in bankruptcy, which means the homeowner cannot be forced to pay them; however the mortgage company and the homeowners association do maintain a lien on the property for the amount owed. This means these creditors have to be paid out of the sales proceeds when the house is eventually sold before the homeowner receives anything. Or in the case of a mortgage company, they can foreclose on the house and take it away from the owner if the mortgage is not paid.


In the case of homeowner association dues there is the additional restriction, that the dues are only discharged if they were incurred before the bankruptcy was filed. The association can go to court and enforce payment for dues that fall due after the bankruptcy filing. This may sound reasonable for a person who continues to occupy the house, but if an individual finds a job in another state and is forced to move this can be a burden, especially if he cannot sell the house and it ends up being foreclosed on. In the current economic environment foreclosures often require a couple of years to work their way through the courts, and all this time association dues can be mounting up.

Using Bankruptcy to Stop Foreclosure

Many individuals facing bankruptcy are also behind on their mortgages and looking at a likely foreclosure of their homes. Thus a frequent question that bankruptcy attorneys here is whether the bankruptcy can stop the foreclosure.

The answer is that a Chapter 13 bankruptcy in which a person makes monthly payments to partially repay their debts can include in their plan a provision to pay back any arrearage on their mortgages and thus end the foreclosure. A Chapter 7 bankruptcy in which the debtor makes no payments does not stop the foreclosure; however, it can sometimes serve to slow down the procedure and thus allow the homeowner to stay in his or her home longer.

The filing of the Chapter 7 bankruptcy creates an automatic stay, which forbids a creditor from taking any action to enforce a debt, and this requires a mortgagee to put the foreclosure action on hold until the homeowner receives a discharge. Whether this actually slows down the foreclosure is somewhat a matter of chance. The mortgage company might be waiting for the statutory minimum periods to pass and the bankruptcy will make no difference. Or the creditor could go into bankruptcy court to allow the resumption of the foreclosure.

In the current environment though in which the courts are way behind processing the backlog of foreclosures a minor delay often turns out to allow the homeowner to stay in his house for a number of additional months.

Perfecting Mechanics Liens in Bankruptcy

        Mechanic’s liens are a secured debt, and therefore while bankruptcy will discharge the obligation to pay the money owed for the services performed, the holder of the mechanics lien can still force a sale of the property to collect what he is entitled to under the contract, or wait and demand his share of the proceeds when other circumstances cause the owner to dispose of the property.

        Section 362 of the United States Bankruptcy Code creates an automatic stay when a debtor files bankruptcy, which prevents a creditor from taking any action to enforce the debt, after a bankruptcy is filed. Since a mechanics lien needs to be recorded to be enforceable, a bankruptcy lawyer  sometimes hears the question, whether the creditor may record the mechanics liens after his customer files for bankruptcy.

         At first glance the answer may appear to be no, since clearly the reason a creditor records a mechanics lien is because he is hopeful that this action will improve his chances of collecting from the creditor.  Section 362 however provides an exception for perfecting liens that are in existence prior to the bankruptcy filing. Since by law the mechanics lien arises, when the work is done, this means that the creditor holding the lien will still be able to record it after the debtor files.

Contribution for College Education of Children of Divorce

Under Illinois law a court may order a divorced parent to contribute to the higher education expense of his or her child, 750 ILCS 5/513. In making this decision the court will consider the financial situation of each parent and of the child, as well as the aptitude of the child for obtaining a higher education. In considering the child’s aptitude though keep in mind that the statute allows the court to order contributions for other forms of post secondary education besides college. Thus if a child wants to attend trade school the court may order the parent to help pay the cost of trade school.

There is no exact formula for determining how much a parent must contribute. Typically the court will look at the comparative income and expenses of both parents to see who can afford to pay more and will also expect the child to make some contribution to his or her education. The way the law is worded the courts should consider the property of the parents as well as their income, although as a divorce lawyer
I have been in front of judges who refuse to look at anything but income in these cases.

In many divorces of course the children have not yet reached the age to attend college and the court will reserve the issue until the child is ready to acquire a higher education. This has the advantage of letting the court consider the financial positions of the parties at the time the education is needed. However, if the parties do not agree it also places the burden on one of them to return to the divorce court years later to resolve this outstanding issue.