Tax Liens and Your Credit

For an entrepreneur, you can’t always have money for daily stock. Sometimes, you have to get someone to supply you on credit. So, debts are ordinary in the business world. Of course, no debt is good debt for it has to be paid. It’s even more problematic when you owe the government unpaid taxes.

Through the Internal Revenue Service (IRS), you can be sure that they’ll make attempts to collect. One strategy they are likely to use is a tax lien. It’s a legal claim on your assets because of outstanding tax debt. It’s not just your business property that a tax lien affects but also your finances and borrowing options.

How Exactly Does a Lien Work?

As mentioned, a tax lien is an official entitlement by the government through the IRS on your property for unpaid taxes. It comes in the form of a written notice that allows the government to claim money generated by your business. In the long run, the government can seize your property if you fail to pay.

Normally, a tax lien favors the government first before your creditors. So, there’s always the chance that the government may claim everything, leaving your creditors with nothing. This is the reason why most creditors are a little hesitant in offering you credit when you have a tax lien on your property.

What Happens to Your Credit Records?

Unlike the old days, a tax lien will no longer prevent you from getting loans from financial institutions. The adjustments were made by the National Consumer Assistance Plan (NCAP) in 2016. However, you should expect your chances to be slimmer until you are able to pay up your tax debt in full. Though a tax lien will no longer affect your tax rating, it doesn’t mean that the lien will be invisible.

Lenders will still be able to see a tax lien that’s placed on your property. This is because a tax lien is a public notice that anyone can access at any time. Lenders who are extra keen on who they lend money to are likely to look into public records before they can give you a loan. At the end of the day, the lender has the final say pertaining to who they’ll lend to and who they’ll not lend to.

What Adjustments Were Made By the NCAP?

There are two major changes suggested by the NCAP. The first one was on the reporting rules. The NCAP advocated for more accuracy when it comes to reporting tax issues to the credit bureau. This means that your tax lien cannot appear on your credit history if your personal information (name, contact address, social security identity, etc.) is not availed.

The second adjustment was about complete removal of an existing tax lien from your credit history. This simply means that your credit score will no longer be affected by a tax lien. The adjustments will not just cover new liens but also older ones. It’s important however to know that a tax lien may have serious implications on your mortgage, vehicle financing, and other borrowing options.

What Should You Do When a Lien Is Filed Against You?

Just because a tax lien will no longer block you from borrowing doesn’t mean that it will go just like that. You have to remove it. Here are ways to do it:

  1. Petition the Lien – The IRS is not perfect. Like all agencies, they are not immune to mistakes. If there was an error in your past tax filing that may be the reason for the tax lien, you should consider filing a petition. So, before running to the bank trying to find money to pay the taxman, you should first verify that the tax lien is really genuine and if you do have such a debt size. If this is not the case, then you should consider appealing it. You’ll need a great tax attorney on your side to help you with the petition.
  2. Consider a Payment Plan – Normally, the quickest way to come out of a lien is to pay what you owe. This is after you have verified that you really have the tax debt that the IRS is claiming. Fortunately, the IRS is always willing to listen to your offer and to accept a reasonable payment plan. Some of the payment options to consider include:
  • File for a lien withdrawal – If you have been filing your taxes accurately in the past 3 years and what you owe dates way back, you have the option of filing for the withdrawal of a tax lien. This, however, doesn’t cancel your tax debt. You’ll have to pay for it.
  • Offer in Compromise – This allows you to settle your outstanding tax liability for less and not what the IRS is claiming.
  • Discharge of Property – This is the legal option of removing a tax lien from a particular property. Nonetheless, the other assets will have a tax lien attached to them. At least, it allows you to have complete financial rights over a part of the property and you can sell it to pay the tax debt.

What If You Still Can’t Get a Bank Loan?

As mentioned early, a tax lien will no longer bar you from accessing a loan but it tends to reduce the number of lenders at your disposal. So, you’ll only be able to talk to just a fraction of banks. If they are not convinced to lend you money because of a tax lien, then you should consider alternative lenders. They act like conventional banks, only that they are more tolerant.

Simply, alternative lenders can tolerate your tax lien if you are willing to pay back the loan at an interest rate that’s higher than what conventional banks charge. This option should be your last resort since you have to deal with the reality of paying a higher fee. The other option is to wait for 30 days for your tax lien to be removed before you can approach banks again. This is assuming you have cleared your tax debt.

Closing Thought:

Generally, it’s good news for borrowers to learn that a tax lien will no longer affect your credit score or make you ineligible for a loan. But still, it doesn’t mean that lenders will line up for you. On the contrary, their number is likely to shrink. So, the secret is just to pay up and have the lien removed.

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