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Debtor Cannot Pay Off Tax Liens on Home Over Longer Period Than Chapter 13 Bankruptcy -Pierrotti v. United States

July 18, 2011

As Redlands foreclosure defense attorneys, we advise clients with tax debts to tread very carefully when they file for bankruptcy. Unlike most other debts, tax debts cannot usually be discharged in bankruptcy, and the IRS has the power to interfere with a proposed bankruptcy plan. That was the case in Pierrotti v. United States, a bankruptcy appeal decided by the Fifth U.S. Circuit Court of Appeals. Carl Mitchell Pierrotti filed for Chapter 13 bankruptcy in order to prevent foreclosure after defaulting on his mortgage payments. But the situation was complicated by an IRS lien on his home for tax deficiencies from 1994 and 2000. As part of his bankruptcy plan, Pierrotti proposed repaying the debt in monthly installments over 15 years, but the IRS objected that this was much longer than the five-year Chapter 13 repayment plan, and the bankruptcy court declined to confirm the plan. Eventually, the court stayed the case and appealed it directly to the Fifth Circuit.

On appeal, Pierrotti argued that his payment plan was legal under two areas of Chapter 13. One allows modification of secured debts other than primary-home mortgages, and the other allows debtors to cure and maintain payments on debts that are not fully due until after the bankruptcy is over. Thus, he argues, he can modify his debt to the IRS and convert it into a longer-term debt, even though Chapter 13 also says plans may not provide for repayment periods longer than five years. The Fifth disagreed. While no Fifth Circuit caselaw directly addresses the question, it noted that a previous decision had found that the long-term debt provision applied only to debts that were originally due after the end of the five-year payment plan. The tax deficiencies are not this kind of long-term debt, the court said. In fact, tax debts generally do not have terms beyond payment by April 15. The Fifth rejected an argument that public policy supports Pierrotti's claim because he would be able to keep his home during such a repayment plan, saying Congress intentionally chose to limit the length of bankruptcy plans.

Our Seal Beach foreclosure defense lawyers are sorry to say that on this last point, the court said nothing unusual. It may be better for society for homeowners to stay in their homes and keep making mortgage payments, but this is not enough to overcome the intention and letter of the law limiting Chapter 13 repayment plans to five years. As the court notes, allowing them to drag on even longer can become close to indentured servitude. We believe most bankruptcy clients would agree that they would prefer to make a fresh start sooner rather than later. In some cases, that means forgiving debts, but IRS debts cannot be forgiven. As Torrance foreclosure defense attorneys, we suspect this means Pierrotti will end up with larger payments on his tax debts that strain the rest of his budget.

If your home is in default or foreclosure and you're considering bankruptcy, you should talk to Howard Law PC about whether bankruptcy is your best choice. For a free, confidential case evaluation, send us a message online or call 1-800-872-5925.

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