While bankruptcy can wipe out your personal obligation to pay certain older tax debt, the lien remains attached to your assets until the debt is satisfied.
Understanding Tax Liens and How They Work
A tax lien is a legal claim by a government entity, such as the IRS or a state taxing authority, against your property when you fail to pay a tax debt. It is important to distinguish between the tax debt (the actual money you owe) and the tax lien (the “security interest” that attaches to your assets).
For example, if you owe $10,000 in back taxes, that is your debt. If the IRS files a Notice of Federal Tax Lien, that debt attaches to everything you own, including your home, car, and future assets. This ensures the government gets paid first if you sell the property.
Common Misconceptions About Liens
- Misconception: “Bankruptcy wipes out all liens.”
- Misconception: “Liens disappear after a few years.”
How Bankruptcy Affects Tax Liens
How your lien is handled depends on which chapter of bankruptcy you choose.
In a Chapter 7, the lien typically survives. Even if the court says you no longer personally owe the tax, the IRS can still look to the value of your property to satisfy the lien.
In a Chapter 13, you can often manage the lien more effectively. Your repayment plan allows you to pay off the tax debt over three to five years. This stops further collection efforts by the taxing entity and can lead to the lien being released upon completion of the payments.
Protecting Your Assets and Managing Repayment
By analyzing the value of your property relative to the lien amount, we can determine whether lien stripping or other protective measures are available to keep your assets safe and to help you develop a plan to resolve your tax debt troubles.
When to Seek Legal Help
You should seek legal help as soon as you receive a notice of a tax levy or lien. Waiting too long can lead to garnished wages or the loss of your home. Professional guidance is critical to ensure you don’t make costly mistakes, such as filing the wrong chapter or failing to list all assets correctly.
Take Control of Your Financial Future
Dealing with the government can be scary, but you don’t have to do it alone. Financial Freedom Legal is here to provide the compassionate, expert guidance you need to stop collections and protect what you’ve worked for. Contact us today for a bankruptcy consultation!
Image credit: // Shutterstock // Piyawat Nandeenopparit
