Your credit report can be a friend or foe – depending on how you’ve handled credit in the past. If you’ve handled it wisely and sensibly, you’ll have a very good credit report, which means you’ll have a good credit score. On the other hand, if you’ve been a bit lackadaisical or downright careless with your credit, you’ll have a bad credit report and consequently a very low credit score.
The 7 things you absolutely don’t want your credit report
If your credit report contains one or more of the following negative items, you will be in trouble in terms of your credit.
- Late payments
- Collection accounts
Your credit score
In the old days before credit scores, the only way a potential lender could determine your creditworthiness was to go through your credit report line by line looking for negative items. This was a boring and time-consuming process. Fortunately for lenders, there are now credit scores, which will tell them almost instantly whether or not they should grant you credit. These scores range from 300 to 850 and, of course, the higher your score the better. If you have a score of 700 or above, lenders will consider you to be “golden” and you should be able to get just about any credit for which you would apply.
The effect of negative items on your score
All these negative items will have an effect on your credit score. For example, a late payment could cause your credit score to drop by 160 points. A bankruptcy might drop it by as many as 200 points. If you have an account go to collection (sent or sold to a collection agency), your score would probably drop by 100 points. And a tax lien from the IRS could drop it by as many as 150 points.
A tax lien from the IRS
You’ve probably heard that old saying that the only things in life that are certain are death and taxes. And one tax that’s absolutely for certain is your income tax. If you have been unable to pay it, the Internal Revenue Service can get a tax lien on your house. This can make it more difficult to sell your house or to refinance your mortgage. However, if there is any good news it’s that you generally must owe $5000 or more before an IRS tax lien will be triggered.
When would the IRS file a lien?
The IRS will file a tax lien against you only after you have received a demand for payment. If you don’t to pay the debt within 10 days of that notice, the IRS will file the lien. In other words, you will have plenty of notice before you’re hit with a lien.
The IRS can’t force you to sell your home
In the event the IRS does file a lien on your property, relax. You can’t be forced to sell your home and the government won’t take your property. But when the time comes that you’re ready to sell your home, the IRS will take whatever you owe out of the sale to pay your tax bill. As an example of this, suppose you have a lien against your house in the amount of $8000. If you were to sell the home for $160,000, you would net only $152,000. And an IRS tax lien may also make it tough for you to do a refi.
Seven long years
Even if you pay your IRS tax lien in full, it will stay in your credit history for seven years after the date you paid it. However, the longer ago it was that you paid the lien, the less of an impact it will have on your credit scores.
The IRS has a Fresh Start program whereby you can ask that it remove your lien after you pay it in full. There is a form you will need to complete. Then, when the IRS withdraws the lien you will need to get that information to all three of the credit-reporting bureaus. If you do so, the three bureaus will most likely delete it from your file and it will no longer appear in your credit report.
The best plan
If you think you may be hit with an IRS tax lien on your house, the best idea is to sell it before the lien is triggered. If you can’t do that, here are the options.
- Pay the bill and then ask the IRS to withdraw the lien
- Do an installment plan. If you owe less than $50,000 and agree to an installment plan, the IRS will withdraw your lien
- Set up a direct debit from your checking account or your employer and then send the IRS a form requesting that it withdraw the lien. You will need to make at least three payments and it may take as long as three months before the lien is removed.
- Sell the house. In the event you have sufficient equity in your house to take care of your tax bill, you could sell the house and use the proceeds to discharge the lien. In this event, you would need to have complete documentation you could send to the IRS. In the event you didn’t have sufficient equity, you can still request that the lien be released. This is because it’s possible the IRS will accept a part payment.
Finally, here’s a video with information about IRS tax liens and how to deal with them.