Do Tax Liens Survive in Chapter 7?

By Tom Streissguth

If you fail to pay taxes, the government can slap a tax lien on your property. The lien gives the Internal Revenue Service or local taxing authority a claim on the amount you receive if and when the property is sold. Ordinarily, back taxes are a priority debt in bankruptcy, meaning the court will not discharge them. However, bankruptcy law allows some exceptions.

Priority Claims

Normally, a Chapter 7 bankruptcy will not discharge income or property taxes, which are priority claims. There are exceptions: Income taxes assessed more than three years before the bankruptcy filing, for example, can be discharged. Property taxes also survive a bankruptcy filing. However, if the property is sold through foreclosure, the property taxes due on the property remain with the property, not with you personally. The lien attaches to the property, and does not follow you after discharge if you should buy another home.

Foreclosure

Chapter 7 will not cancel any IRS tax liens -- these remain priority claims even if the tax debt is more than three years old. Bankruptcy does halt any legal proceedings against you -- temporarily. After the discharge, the IRS may still foreclose on the lien, forcing you to sell the property. The IRS has a claim on any equity that remains after the mortgage is paid.

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Determining Lien Value

In order to clear off the lien, you must establish that it is not worth anything, or worth less than the value of your assets. You can do this by filing a Motion to Determine Lien Value. You will have to show that the equity in your home, or the value of your property, is less than the amount of the tax lien. If the lien was for dischargeable tax debt, then the court will reduce it to the amount of equity you do have available, or to zero if you have no equity.

Lien Survival

If the court does not act on a motion to determine lien value, then the IRS retains its lien no matter how much, or how little, equity you have in your home. In addition, the lien on the home will remain even after the bankruptcy is discharged. This will remain the case until the house is sold, or until the IRS fails to renew the lien after 10 years, the statutory limit on federal tax liens.

IRS Errors and Exceptions

There are also circumstances in which liens can be found invalid in bankruptcy. The IRS may have established an installment agreement with you for repayment of the tax debt. If you make timely payments, then the agency cannot assert a lien. In addition, if you can show that withdrawal of the lien will help you pay the back taxes (by making it easier to sell the home, for example), then the IRS may cancel it. Tax debts expire by statute after 10 years, so no lien can be asserted after this time has passed since the tax was due. If the IRS or any other agency files a lien after you petition for Chapter 7 bankruptcy protection, then the lien is barred by law.

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References

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Can Creditors Attempt to Get Money After a Discharge?

When you file a petition for bankruptcy, you are asking a federal court for protection from creditors and time to work out your financial difficulties. In a Chapter 7 case, the court authorizes a trustee to seize your assets and sell them in order to repay creditors. In a Chapter 13, the trustee sets up a repayment plan, taking into consideration your assets as well as your income. Unless the case is dismissed, both kinds of bankruptcy conclude with a cancellation of debts you owe to some — but not all — of your creditors.

What Won't Be Dismissed in Chapter 7

In a Chapter 7 bankruptcy, often called liquidation bankruptcy, a debtor's non-exempt assets are sold to pay the debtor's creditors. Often, a debtor has no non-exempt assets -- or not enough to cover his debts. In such cases, the debtor's remaining, unpaid debts can be discharged, or erased, by the bankruptcy court. Not all debts, however, can be discharged.

Can a Chapter 7 Be Filed if a Debt Has Placed a Lien Against You?

You can file for Chapter 7 bankruptcy after a creditor has placed a lien against your property, but bankruptcy can provide relief from liens only if you take additional action after you file. Otherwise, liens often are not affected by the bankruptcy. Even when you are willing to take additional action to deal with liens in your bankruptcy, not all liens can be removed or reduced. It depends on the type of lien it is and the property it is attached to.

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