Will Filing For Chapter 7 Bankruptcy Remove A Tax Lien?

Filing for bankruptcy can erase the tax debt you owe, but it usually won't touch the lien the IRS or your state filed against your property to secure that debt. A tax lien stays attached to your property until you satisfy it or the collection period runs out. Chapter 7 doesn't erase that lien, even after your discharge. It just eliminates your personal obligation on the debt. Chapter 13 can't wipe it out either, but its repayment plan lets you pay it off over three to five years.

Chapter 7 vs. Chapter 13 Tax Lien Treatment at a Glance

Here's how a tax lien plays out under each chapter:

Tax Liens and Chapter 7 Bankruptcy

Many filers are surprised that a tax lien doesn't disappear just because the debt behind it gets discharged in Chapter 7. The taxing authority can't come after your wages or bank account once your case closes, but you'll still owe the lien itself when you eventually sell or refinance the property. Even property that's otherwise protected by a bankruptcy exemption stays subject to a properly recorded tax lien. (11 U.S.C. § 522(c)(2)(B).)

Exceptions That Can Remove a Tax Lien

That said, a tax lien isn't always untouchable. You can sometimes challenge and remove one, though you'll likely need a bankruptcy attorney's help to do so. Grounds for seeking relief from the bankruptcy court include:

• the IRS never actually recorded the lien
• the taxing authority recorded the lien in violation of the automatic stay
• 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 the applicable collection period.

Recording a lien in violation of the automatic stay can be challenged, though the Bankruptcy Code carves out certain IRS actions—like assessing tax and issuing a notice and demand—that remain permitted even after you file. (.)

How the Collection Period Works

The IRS generally has ten years from the date of assessment to collect a federal tax debt, and once that clock runs out, the lien can fall off. Don't count on this one too heavily, though. Filing bankruptcy pauses the clock for as long as your case is open, plus another six months afterward, so it rarely helps as much as filers hope. (I.R.C. § 6502; I.R.C. § 6503(h).)

Keep in mind this ten-year rule is a federal rule—state tax lien collection periods vary and can run longer, so check your state's specific statute before assuming a state lien has expired.

Can You Get Rid of a Tax Lien in Chapter 13 Bankruptcy?

Not outright, but Chapter 13 gives you more to work with than Chapter 7 does. You can split the lien into secured and unsecured portions and pay off both through your repayment plan. Since Chapter 13 repayment plans run three to five years, a tax lien is treated as a secured claim only up to your equity in the property it's attached to, which is a figure closely tied to your Chapter 13 exemptions. Any portion of the lien beyond that equity gets reclassified as an unsecured claim, a process known as bifurcating the lien. (11 U.S.C. § 506.)

What Happens to Your Tax Lien in Chapter 13

Chapter 13 divides a tax lien into three parts, and each gets treated differently:

• The secured portion (up to your equity) must be paid in full, with interest, through your Chapter 13 plan.
• The unsecured portion tied to recent taxes—generally those falling within the priority lookback period—is a priority claim that must also be paid in full, though usually without interest, even if it exceeds your equity. (11 U.S.C. § 507(a)(8).)
• The unsecured portion tied to older, dischargeable taxes gets folded in with your other general unsecured debt and may be paid at just a fraction of what's owed.

What Happens When Your Plan Is Complete

Finish paying off the secured and priority portions, and the lien gets released. In the meantime, Chapter 13's automatic stay also keeps the taxing authority from levying your property, buying you time to work through the debt. Just know that valuing your equity and getting a lien released usually requires a court proceeding, so a bankruptcy attorney's help is worth the cost here, too.

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 you haven't paid. When you sell the property, the government agency is paid from the sale proceeds. Or it can seize the property outright to recoup what you owe, which is called a tax levy.

Other Ways to Remove a Tax Lien

The most direct way to remove a tax lien is simply to pay off the taxes you owe. If you have the money, do it in one lump sum. If you don't, contact the taxing authority and see if you can work out an installment plan instead.

Getting Help From a Bankruptcy Attorney

If you're not sure whether Chapter 7 or Chapter 13 fits your situation better, talk with an experienced bankruptcy attorney before you file. They can help you value your equity, check the lien's filing date, and confirm the applicable collection period, so you know exactly where you stand.