Although you can get rid of some tax debts in Chapter 7 bankruptcy, if a tax lien has been recorded against your property, you are unlikely to be able to remove it in Chapter 7 bankruptcy. There are a few exceptions, however. Read on for details.
What is a Tax Lien?
A tax lien is a lien recorded against your property (usually your home or other real property) that secures the government's right to collect taxes or penalties that you haven't paid. When you sell the property, the government agency gets paid from the sale proceeds. Or, the government agency can choose to seize your property in order to get reimbursed for the unpaid taxes -- this is called a tax levy.
Chapter 7 Bankruptcy and Tax Liens
The good news is that some types of tax debts may be discharged (eliminated) in Chapter 7 bankruptcy. (To learn more, see Will Filing for Chapter 7 Bankruptcy Discharge Tax Debts?). The bad news is that if the IRS or other taxing authority has recorded a lien against your property for the debt, the lien remains even if the underlying debt is discharged. This means that the the taxing authority cannot go after your wages or bank account, but you will have to pay off the lien when you sell the property.
There are some grounds for asking the bankruptcy court to challenge a tax lien. For the most part, you'll need the help of a bankruptcy attorney to do this. Some of these grounds include:
- the IRS never actually recorded the lien
- the taxing authority recorded the lien after the automatic stay was in place
- the lien was recorded in the wrong county or against the wrong property (for example, it recorded the lien against your daughter's home, not yours), or
- the lien is older than ten years.
Other Ways to Remove Tax Liens
The most direct way to remove a tax lien is to pay the taxes you owe in full. If you have the money, you can do it in one lump sum. Or, you can contact the taxing authority and try to work out an installment plan to pay the taxes over time.
If you plan to file for bankruptcy and think you might qualify for one of the narrow exceptions which allows you to remove a tax lien, consider consulting with an experienced bankruptcy attorney.