Changes to Credit Reporting: Tax Liens and Civil Judgments Will Disappear

Many tax liens and civil judgments will be deleted from credit reports soon, which means millions of consumers will see their credit scores change by an average of 10 points or more.

Removing a tax lien from your credit report

Removing a tax lien from your credit report

Credit scores are about to shoot up for millions of Americans with tax liens and/or civil judgments on their credit reports.

Earlier this year, the three major credit bureaus laid the foundation for this change by starting the National Consumer Assistance Plan (NACP), a policy organization started by the big-three credit bureaus – Experian, Equifax and TransUnion – that calls for changes to the way certain information is used on your credit history.

Part of that plan addressed tax liens and civil judgments, two types of derogatory marks that will be removed from many credit scores on July 1, 2017.

According to data group LexisNexis, 98% of civil judgments will be removed and 50% of tax liens will disappear from credit reports.

We found this bit of news quite interesting because it brings up several questions that directly affect you, the consumer:

  • What is a tax lien?
  • What is a civil judgement?
  • Why are they being removed from your credit history?
  • How will it affect your credit scores?

Part of the reasoning behind this change is that some consumers have incorrect tax liens and judgments on their credit history but even consumers with accurate information will have their judgments and liens removed on July 1.

This interesting twist made us wonder how the new change will affect lenders, whose job it is to give money to consumers based on your risk. Will removing accurate information give risky consumers better credit scores?

To answer all the questions we’ve posed, we reached out to experts through email and phone to get their opinion on the matter.

Over the next few minutes, we’ll include our research-based observations as well as those of other experts.

What Is a Tax Lien and How Does It Affect Your Credit Scores?

Anytime you hear the word “lien9rdquo; think, “claim to ownership.” That phrase implies there are two things at play: the person making the claim and the thing being claimed.

An IRS tax lien kicks in when you don’t pay your taxes; the IRS stakes a claim or “lien9rdquo; on all or some of your property.

A tax lien, in relation to your credit scores, is what’s known as a “derogatory mark,” something that shows up on your credit history and, consequently, lowers your credit scores. Over time, the impact of the derogatory mark weakens, but, in many cases, it won’t disappear until seven years after the fact.

What is a Civil Judgment and How Does It Affect Your Credit Scores?

A civil judgment is what happens when you don’t pay a debt you have and the company collecting that debt takes you to court to ensure they get the money you owe them.

It’s basically a legal decision saying you have to pay the company back. If you go to court and have a civil judgment against you, that information goes on your credit report.

Consider civil judgments the worst of the worst in terms of payments – they only happen after you’ve defaulted on your account, your account has been charged off and sold to a debt collector and the debt collector has been unsuccessful in getting your payments.

Why Are Tax Liens and Civil Judgements Being Removed From Credit Reports?

The removal of tax liens and civil judgments from credit reports is the result of Experian, Equifax and TransUnion’s beefed up NCAP standards that are designed to “ensure the data they maintain on their consumer credit files is accurate and current,” a March, 2017 press release from the Consumer Data Industry Association said.

Per this mission, they decided to enhance their “public record data standards for the collection and timely updating of civil judgments and tax liens.”

That enhancement includes the following two guidelines that must be fulfilled in order for liens and judgments to remain on credit reports.

These guidelines are applied to tax liens and civil judgments in the public record that are reported to the credit bureaus:

  • Have to include the consumer’s name, address and date of birth or SSN
  • Courthouse must check and update records at least every 90 days

If either of those conditions is not met, then the records can be removed from the consumer’s credit score.

John Ulzheimer, a well-respected expert in credit scores and a source with whom we’ve spoken in the past, said there’s a good chance most records – even accurate ones – will be removed because of the stringent new rules.

“The credit bureaus have self-imposed minimum data standards in order to collect and maintain liens and judgments,” Ulzheimer told us in an email. “Those minimum standards are very strict and, as such, most judgments and half of liens cannot comply and will be removed.”

Strict Credit Report Standards Protect Consumers

The specific minimum data standards will be a big help to consumers who’ve had to deal with incorrect tax liens or civil judgments placed in their credit history.

For example, it’s conceivable that a civil judgment could show up on your credit report because the courthouse providing the information only gave a name and that name happens to match yours.

So, by requiring that all reported civil judgments and liens have the consumers name, address and DOB/SSN, you’re guaranteeing there aren’t any mix-ups and innocent consumers aren’t hit with derogatory marks.

Strict Standards Mean Even Accurate Information Will Be Removed From Credit Reports

Like Ulzheimer, Consumer Union Policy Analyst Maureen Mahoney expects that nearly all civil judgments will be removed and about half of tax liens will disappear.

“Making sure that credit reports are accurate is of key importance, and we expect that these practices will help improve accuracy going forward,” Mahoney told us in an email. “The burden should be on creditors and credit bureaus to be able to document that a consumer’s credit report only includes information that belongs to the consumer.”

Small Percentage of Consumers Have Incorrect Judgments/Liens on Credit Report

Here’s the interesting part: Mahoney referenced a 2012 article from the Columbus Dispatch that said around 15% of filed credit report complaints cited errors with court records. Another 25% of those people said their credit reports showed court judgments/records that weren’t theirs.

In other words, only about 4% of consumers who filed complaints about inaccurate information on their credit report actually had somebody else’s court judgment on their credit history.

So, nearly all civil judgments are being removed because less than 4% of consumers who filed complaints about their credit reports had court judgments wrongly associated with their credit report.

Yet, nearly all civil judgements will be removed from consumers’ credit reports on July 1, which tells us that correctly reported liens and judgments will be deleted from credit reports.

The total number of credit reports that will see increases? Around 11 million.

LexisNexis says removing liens and judgments will raise scores at least 10 points on average and that nearly half of consumers with scores below 620 will see their score rise at least 20 points.

This is a win for the consumer, right? Many people are benefitting from reporting standards brought about by the complaints of a few.

However, when it comes to credit scores, we often forget that there is another group of people who are affected by wholesale changes to credit scores: the lenders.

How Will the Change in Credit Scores Affect Lenders?

We read through the CDIA’s press release about the upcoming changes and noted that they said they’ve been working with financial institutions to explain the changes.

According to that release, the changes shouldn’t be a big deal.

“We believe the enhanced standards for record accuracy while at the same time ensuring that creditors can continue to rely on credit report data and credit scores derived from the data,” the CDIA wrote.

So, consumers get the benefit of seeing some really ugly information removed from their credit report and lenders don’t have to worry too much about the changes, right?

Not so fast, says Catherine McDermott, president and CEO of Virginia-based RiverTrace Federal Credit Union.

You see, from a lender’s perspective, consumers are seen as credit risks. Good credit risks are consumers who pay their loans back on time. Bad credit risks are consumers who don’t.

“Just because someone’s credit score is magically improved because of the removal of liens and judgments doesn’t make them a better credit risk,” McDermott told us. “It9rsquo;s been proven time and again that consumers with liens or judgments are twice as likely to default as consumers who don’t have any on their credit reports.”

That’s right: Consumers who have judgments or liens on their credit report are two times more likely to stop paying their loan or credit card as someone with a squeaky-clean credit history.

Now, the past decade has been an exercise in bank-hating – consumers were fed up with greedy financial institutions taking advantage of consumers through self-centered asset decisions and a crazy number of fees and charges.

However, that ire doesn’t change the fact that, for the average consumer, a bank or credit union like the one McDermott runs is a place where you store money and borrow money.

An Example of How Deleted Credit Report Information Can Hurt Lenders

So, let’s say in a made-up world you’ve got a friend of a friend who wants to borrow $500. Just like always, you do some investigative work to find out if this person is good for the amount. Will they pay you back, or will they take the money and run.

Well, in this fictional world we’ve created, people who’ve borrowed money and didn’t pay it back are supposed to have a red flag on their Facebook profile. Consider this the derogatory mark they’d normally have on their credit scores.

Why is this mark so important? Because people with the red flag are twice as likely to not pay you back.

One day, Facebook decides to remove these flags because there have been some isolated cases in which red flags were accidentally given to the wrong profile. The friend of a friend wins, but you lose.

Why 20 Points Makes a Big Difference

Dara Duguay, executive director of Credit Builders Alliance, says that most scores won’t be changed by more than 20 points and that less than 11 million consumers will be affected.

How big of a difference do those 20 points make?

Catherine McDermott told us that increase could bump a consumer up into the next credit-rating tier, making financing available to them that they wouldn’t have been able to get before.

Her credit union ranks consumers based on a letter grade: D, C, B and A are examples.

“If someone comes across our desk with a D credit score, we automatically turn them down,” McDermott said. “When July 1 st rolls around and that same person comes along and the judgement or lien is gone, their score will improve because those previous marks won’t drag the historical data down and they’ll cross the threshold from a D borrower to a C borrower.”

Crossing that threshold means access to better rates and terms on loans and credit cards. A jump from bad to fair credit, which can happen with a good 15 or 20 points, can put you in the running for fair-credit credit cards with far better terms than credit cards for bad credit.

Credit Scores Change, Habits Stay the Same

Now, you might be thinking this is actually a good thing: the average consumer gets a better score and better financial products.

However, better credit scores don’t equate to better spending habits, and it’s those habits, McDermott says, that will lead to the undoing of the consumer who crossed from D to C when accurate information was deleted from their credit history.”

“We9rsquo;d grant them the loan and, because of their poor payment history, they’d fall into that same pattern and ultimately go into delinquency,” she said. “(The new rules) really muddy the water due to the fact that you aren’t getting the full view of this person’s credit history.”

And when a new wave of consumers comes and defaults on their loan/credit obligations, good consumers suffer.

“We9rsquo;ve now granted them credit they can’t pay, which will put them in default and will be a problem for the credit union in terms of charge offs,” McDermott said. “Financial institutions will suffer losses and that will cause rates to go higher for good consumers.”

Our Final Thoughts: Are the Changes to Credit Scores a Good Thing for Consumers?

We’ve wrestled with this question because there are so many things at stake with credit scores.

The new standards will definitely help consumers with bad information incorrectly assigned to their credit report, but it will also help consumers who have bad information correctly assigned to their credit report.

While the bump in credit score may be nice for consumers who actually do have tax liens and civil judgments, it puts lenders in a tough spot because liens and judgments represent a significantly higher rate of default.

Without knowing if a consumer has had a tax lien or civil judgment, financial institutions like RiverTrace could be giving loans to people whose credit scores don’t accurately reflect their spending and debt-management habits.

The more loans and lines of credit that go into default, the higher the cost for the financial institution and, consequently, the higher the rates for irresponsible and responsible borrowers.

However, says John Ulzheimer, information network LexisNexis has responded to the imminent changes by creating a product that allows financial institutions to do thorough public records searches to figure out if potential borrowers have judgments or liens that don’t show up on their credit reports.

“Lenders have to decide on their own if the potential for a missing public record is problematic enough to go out and check for the data on their own,” Ulzheimer said. “In fact, LexisNexis has already announced a service to do just that.”

The service he referred to is called the RiskView Liens & Judgments Report. According to the company’s site, they can provide information about liens and judgments that is 99% accurate.

“If I ran a credit reporting agency I would have immediately begun working on a project to comply with the personal identification indicator and verification requirements of liens and judgments so I could get them back on consumer credit reports,” Ulzheimer said.

The Basics of Credit Scores and Credit Bureaus

Is your head spinning from all this talk of credit scores, scoring models and derogatory remarks? Don’t worry; it’s normal. We’ve spent hours and hours researching credit scores and there are still parts of that world that confuses us and require some clarification.

As we’ve studied credit scores we’ve managed to pick up a lot of helpful information along the way via interviews and online research. The articles listed below are most pertinent to our discussion here. Each one is an in-depth, easy-to-read guide:

How to Remove Tax Liens from your Credit Report

September 5, 2016

How to Remove Your Tax Liens from your Credit Report

Tax lien is the right of the IRS or state or country to take possession of the property in-case of negligence in paying property tax or income tax. It is filed in-order to force the tax-payer to pay his/her outstanding tax amount. However, when filed it is also recorded in the public record and then added to the consumer credit report. It can be viewed by anyone including credit reporting agencies.

Tax lien has derogatory impact on the credit score. Consumers with no other credit issues could lose 100 points with tax lien. Being one of the most difficult credit issues to overcome, it can stay on the credit report for 7 years and in certain situation, forever! Unlike other collection accounts, it is not mandatory by the law to remove it from credit report after 7 years. According to Fair Credit Reporting Act (FCRA), the tax lien may be removed from credit report, 7 years after the date of payment of outstanding tax amount.

So, How do you remove tax liens from your Credit Report?

The good news is that It is possible for consumers to remove the tax liens prior to 7 years, as long as it’s paid. The ‘Fresh Start Initiative’ from IRS has released new policy to handle tax liens. Full payment of outstanding tax amount will facilitate taxpayers to withdraw lien from credit history, upon request. Some eligibility criteria facilitates taxpayers to withdraw after a minimum of 3 payments towards the payment agreement. However, it should be noted that removing tax liens from credit history is not always possible, but customers can try a number of steps to get the lien removed.

Do You Qualify? You may request to withdraw tax lien for credit report if:

  • You have paid the full amount you owe and lien has been released
  • For past three years, you are in compliance with providing your individual, business returns
  • You are up-to-date on your tax payment and deposits
  • You owe $25,000 or less and have agreed on the direct debit installment payment toIRS, from your back account automatically.

You could ask tax professionals to learn more about the eligibility criteria. Pay the Outstanding Tax Amount:

  • After full payment of you due, you may receive the IRS Form 668(Z) for ‘Release of Federal Tax Lien’
  • Fill out IRS Form 12277 for ‘Application of Withdrawal’
  • Submit ‘Notice of Federal Tax Lien’ IRS Form 668(Y) along with above two form to IRS and provide explanation of why you want your tax lien to be withdrawn.
  • You may receive the IRS Form 10916(c) for ‘Withdrawal of Filed Notice of Federal Tax Lien’. It is also filed in the recording office where the original NFTL was filled.

You may produce these documents to the credit reporting agencies or ask IRS to to notify them.

Summary: How to remove tax liens from your credit report

Above all, send a goodwill letter to all three credit bureaus, explaining your full payment of outstanding money. Give honest reason why you defaulted. Address the issues behind tax lien and steps you took to pay what you owe. Moreover, be patient! The complete process may take months to reflect on your credit report.

Used car dealer located in Salt Lake City and Ogden specializing in helping those individuals with less than perfect credit get into a vehicle and car loan.

Here's How To Get Tax Liens Scrubbed Off Your Credit Report

Removing a tax lien from your credit reportFlickr/David Goehring

On February 24th the IRS announced new policies regarding the collection of unpaid taxes and liens. Specifically, if the tax payer pays their liens "in full" the IRS will "withdraw" them. What does this mean for consumers' credit reports?

Simply put, tax liens are now the only derogatory item on a credit report that will be removed once it has been paid, as long as you play your cards right.

Do you have an IRS tax lien on your 2013 credit report? Visit here to see your full report online now.

An unpaid tax lien can remain on a credit file indefinitely per the Fair Credit Reporting Act. In the old days, pre February 24th, even when paid the lien remained on file for an additional 7 years and was only shown as "released." And, a released tax lien is just as bad for your credit as an unpaid tax lien. This new IRS policy suggests that if you pay your liens in full they will be removed from your credit files much sooner, and this was confirmed by all three credit reporting agencies and their trade organization, the Consumer Data Industry Association (CDIA). According to Norm Magnuson, Vice President of Public Affairs for the CDIA, "I've confirmed that all three credit reporting agencies remove withdrawn IRS tax liens."

Tax liens are one of FICO's "Seven Deadlies" and can severely damage your FICO scores for years. The new IRS policy offers hope to consumers who want to clean up their credit sooner rather than later. However, some don't agree that this is a good idea. IRS liens, which can remain on a credit report longer than anything else, are now the only derogatory item that could be removed once paid. This "opportunity" doesn't apply to any other derogatory debts such as collections, foreclosures, repossessions or defaulted credit cards. Ironically, this is the type of "pay for deletion" scenario that is generally frowned upon by the credit reporting industry.

The question some are asking, and it's a legitimate concern, is whether or not the removal of a tax lien waters down the value of the credit report. If tax liens are indicative of elevated credit risk, and they are, then removing them would mask the consumers true credit risk. Lenders could be duped into granting credit for someone they may have considered too risky if they had seen the lien. Still, "most people with a tax lien have other negative history and that other negative history will continue to weigh down their score", according to FICO spokesperson Craig Watts.

The new IRS policy doesn't apply to tax burden settlements. The new IRS rules don't offer a withdrawal if the lien is only settled, "Full payment" is required, according to the IRS website. So, if you can't afford to pay off your lien in full you'll still eventually have a released lien on your credit files for 7 years from the date it was settled.

If the lien is the only negative item on your credit reports, and if the lien is fairly recent, this new IRS policy can result in a monumental change in a consumer's score. In fact, my estimates show a potential 100 to 200 point increase, under some circumstances. At the very least a consumer's score should improve. The amount of the improvement will be determined by the age of the lien and what other negative items, if any, are on the consumer's reports.

Withdrawal of the lien is only at the consumer's request. This is important as the process to have the lien removed isn't "autopilot." In fact, if consumers are unaware of the new IRS policy they might never ask to have the lien listed as "withdrawn", and thus they'd have 7 more years of credit reporting. The IRS announcement is clear on that matter, "Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it." Consumers with withdrawn liens should notify the credit reporting agencies of the new status and ask them to be removed.

Finally, approved payment plans for larger liens will also result in a withdrawal perhaps even before the full payment has been submitted. In these cases the credit reporting could be stopped even before a full lien balance has been exhausted. The IRS was in a good mood yesterday.

Do you have an IRS tax lien on your 2013 credit report? Visit here to see your full report online now.

How To Get Negative Items Removed From Your Credit Report

September 4, 2013 by Paul Ritz

Removing a tax lien from your credit reportThere are seven negative items that will have a very damaging effect on your credit score. They are:

  • Debt collections
  • Late payments
  • Foreclosures
  • A bankruptcy
  • A tax lien
  • Lawsuits or judgments
  • Charge-offs

The only way you can know if you have any of these negative items in your credit reports is to get and review them. The federal government has mandated that the three credit reporting bureaus – Experian, Equifax and TransUnion – must provide you with your credit report free once a year. You can get your reports by contacting each of these bureaus individually or you could get them simultaneously at the site Whichever you choose it’s important that you get your credit reports and that you review them carefully, looking for the negative items listed above.

What you can and can’t get removed

Of the seven items listed here, there are only four you can do something about –IRS tax liens, debt collections, late payments and charge-offs. Despite what some people might want you to believe, there is nothing much you can do about foreclosures, a bankruptcy, a judgment or lawsuit except wait seven years for them to fall out of your credit report

Debt collections is a shorthand way of saying that you had an account that went to a debt collector. Lenders often bundle up debts they no longer believe they can collect and sell them to debt collectors – usually for pennies on the dollar. You’ll know you’ve had a debt collection when you receive a phone call from a debt collector. We’ll assume for the sake of this example that the debt is legitimate and that you must pay it. Since the debt collection agency probably paid very little for that debt, there is room for negotiation. As part of the negotiation you should insist that when you do pay, the collection agency removes the item from your credit reports. Be sure to get this in writing as well as the amount you have agreed to pay.

There is a simple way to get an IRS tax lien removed from your credit report. Just pay it off. When you do, the government will remove this from your credit report within 30 days.

This is basically an accounting thing. If after six months a lender believes that it won’t be able to collect the debt from you, it will bookkeep it as a charge-off. However, this does not cancel your debt. If you pay the debt in full, your lender will probably report it to the three credit bureaus as “paid charge off.” This is certainly better than having the debt listed as a charge-off but not as good as having it removed from your credit report. There are three ways to get a charge off removed and this brief video that explains them.

There are three ways to get a late payment removed from your credit report. And it’s a very good idea to do this. Some financial experts believe that a late payment can drop your credit report by as much as 180 points. The first way to do this is to ask for a “goodwill adjustment.” If you have a good credit history with the lender, it may grant you one of these adjustments. What you would need to do is write a letter to the creditor explaining why you were late and asking that it “forgive” your late payment.

Second, you could ask that the item be removed and that in return you will sign up for automatic payments. This can be good for both you and your lender. You will have the late payment removed from your credit report and your lender will know it will be receiving all your payments on time in the future.

Finally, you could dispute the late payment. There are instances where the creditor may have a difficult time verifying the details of your debt. If you find inaccuracies such as the amount owed, the date of the debt, etc., you could dispute the item as inaccurate. If your lender is unable to completely verify the debt, the credit bureau will remove it from your credit report. You can file a dispute with the appropriate credit bureau via letter but will need to have some supporting documentation to prove your case.

The five components of your credit scoreRemoving a tax lien from your credit report

If you are not familiar with how your credit score is computed, it has five components.

  • Payment history
  • Amount of credit used
  • Types of credit
  • Credit history
  • Credit requests

Two of these components – your payment history and the amount of credit you have used account for 65% of your credit score. You can see from this how important it is that you use your credit wisely. The best ways to keep your credit score up above the magic 700 point level are to make all of your payments on time, pay your balances in full every month and keep the amount of credit you’ve used low versus the amount you have available. This is called your debt-to-credit ratio and unlike your credit score, lower is better. As an example of this, if you have total credit limit of $10,000 and have charged only $2000, you have a debt-to-credit ratio of 20%, which would be considered very good. Conversely, if you had used up $6000 of that $10,000, your debt-to-credit ratio would be 60% and this would be bad.

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Your credit history shows creditors how you handle debt. but other negative information sneaks onto the report too. This includes information about Federal income tax liens.

An unpaid tax lien represents a derogatory mark that will anchor your credit score. Even a paid tax lien will affect your credit score for seven years. But you can remove a tax lien from your credit report. This is how.

An unpaid tax lien for Federal Income taxes can stay on your credit report forever. It will persist through bankruptcy and other credit catastrophes. It is the only negative mark that could stick on your credit report indefinitely. Although, in practice, most credit bureaus remove information about unpaid tax liens after ten years.

Paying a tax lien means it will fall off your report seven years after you complete payment. However, that’s not the fastest way to remove a paid tax lien from your credit report. Paying the tax lien in full satisfies your obligation to the Federal government, and it opens up the possibility of enrolling in the IRS’s Fresh Start Initiative.

The Fresh Start Initiative is a program where the IRS will withdraw their tax lien if you meet certain conditions. As soon as the IRS completes the withdrawal, you will no longer see the tax lien on your credit history.

If you cannot pay the tax lien, set up a Direct Debit Installment plan to payoff the tax lien. The payment plan opens you up to the Fresh Start Program under certain conditions.