Not being able to pay federal or state income taxes can lead the IRS or the state to place a tax lien on your real property and personal property. Filing for bankruptcy can help in many situations resolve the issues and consequences that can result from having a tax lien placed on your personal or real property.
TAX LIENS IN CHAPTER 7 BANKRUPTCY
Although Chapter 7 bankruptcy does not eliminate a tax lien from your property it can in essence strip down the tax lien where the taxes are dischargeable. If the taxes fall under the category of dischargeable debt then you may be able to reduce the tax lien through a de facto stripping.
For example: Let’s assume that you have an IRS tax lien for $20,000. Let’s assume also that you only own personal property and the value of your personal property in total is $5,000. If the IRS tax debt is dischargeable debt in a bankruptcy then when you file for Chapter 7 the IRS tax lien only survives to the extent of your personal asset value at the time of filing. As a result the tax lien has in essence been reduced to $5,000. IRS tax liens are good for 10 years from the date of assessment, and cannot be renewed if the debt has been discharged as part of a bankruptcy. In situations like this it is uncommon for the IRS to seek to enforce the tax lien against personal property such as clothing and furniture. The benefit is also that the lien will not attach to any post-petition income or property.
TAX LIENS IN CHAPTER 13 BANKRUPTCY
There are also several options that are available in a Chapter 13 bankruptcy to resolve tax liens on personal or real property.
If the taxes owed from the tax lien are not dischargeable and are priority debts, then you may simply wish to pay the owed amount as part of Chapter 13 bankruptcy. Chapter 13 bankruptcy allows you to set up a repayment plan in which you can pay off taxes through a repayment plan.
If you own minimal assets, then you can reduce the tax lien to the value of your assets at the time of filing. In a Chapter 13 bankruptcy the tax lien is treated as secured only to the extent that there is equity in assets that it attaches to at the time of filing. If your assets are only worth $7,000 and there is a tax lien for $50,000, then you would cram down the tax lien to $7,000. Only $7,000 would be treated as secured as part of your bankruptcy plan. The remainder of the taxes would be treated as either unsecured priority taxes that must be repaid in full or unsecured general claims that may be paid the same as other general claims. This process can substantially reduce the amount that is required to be paid to eliminate the tax lien.
If you have tax liens recorded against your personal or real property it is important that you consult with a tax attorney or bankruptcy lawyer who can give you strategies for reducing or eliminating the tax lien.