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Tax Liens in Bankruptcy

How a bankruptcy order treats tax liens and debts is a mystery to many filers.

Bankruptcy may eliminate income tax debts in certain cases. Chapter 7 may completely eliminate taxes, while Chapter 13 may help filers pay off tax debts over a longer period of time.

Tax liens may survive bankruptcy, but only up to the value of the filer's equity in the property. Plus, making payments through a Chapter 13 plan may help a filer defeat a tax lien.

Tax Liens in a Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a powerful tool for people who cannot pay their taxes and other debts due to financial struggles. With credit card bills and healthcare bills reaching all-time highs, many consumers are unable to pay Uncle Sam.

Through a Chapter 7, filers may be able to discharge tax debt, provided that the debt is related to income taxes, is not a product of fraud, and meets a few other requirements.

Tax liens in Chapter 7, however, are a different story:

  • Tax liens. Even if tax debts are discharged in Chapter 7 bankruptcy, if the IRS had placed a lien on property before the bankruptcy filing, this lien will likely remain.
  • Reduced value. However, tax liens are often significantly reduced in value during bankruptcy. For example, if the IRS placed a lien on a home worth $90,000, but the homeowner only held $10,000 in equity on the home after bankruptcy, the tax lien would only be worth $10,000.

So, while a bankruptcy discharge does not cancel a tax lien, these property attachments may be worth much less than the IRS originally expected.

Tax Liens in Chapter 13 Bankruptcy

Contrary to Chapter 7, tax debts are not usually discharged in Ch 13 bankruptcy. However, Chapter 13 allows filers to make payments on their tax debts over a long period of time.

If filers are able to catch up on their tax debts over the Chapter 13 payment period, which usually lasts three to five years, the tax lien on their property may be eliminated.

As a result, Chapter 13 offers a potential long-term solution to tax problems. To try to extinguish tax liens in Chapter 13, filers must have a steady source of income.

This income need not come from wages. Many Chapter 13 filers make payments using Social Security payments, pension payments, and other non-wage forms of income.

For more information on eliminating your tax liens in bankruptcy, connect with a local lawyer for a free consultation by completing the free case review form below:


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