Tax liens are one-way state and federal tax authorities can pressure taxpayers into paying off their debts. But what if a taxpayer is at the end of their rope financially, and decides that the best thing to do is file for bankruptcy? Can tax liens be wiped out in bankruptcies?
Well, bankruptcy can resolve most consumer debt issues, but there are debts that remain unaffected by bankruptcy, meaning they are non-dischargeable. If you owe property taxes, for example, you will continue to owe them until your tax debt is paid, or the property is no longer yours. If you owe income tax debt, then there are certain circumstances under which your debt may be discharged, but it’s not 100 percent certain. But if a state tax authority or the IRS issue a tax lien on your property, bankruptcy will not resolve that lien. Learn more below.
What is a Tax Lien?
A tax lien is a legal claim on a person’s property by a local tax authority, state tax authority, or the IRS. It is not to be confused with a levy, which is when the tax authority takes property away from you, or garnishes a portion of your paycheck.
Liens limit your ability to seek financing because they supersede all other claims to your property. Furthermore, a tax lien means the government has secured your debt – if you attempt to liquidate a property, you are forced to use the proceeds of the sale to satisfy your tax debt, first.
Can Tax Liens be Wiped Out in Bankruptcies?
Chapter 7 bankruptcy requires you to dissolve your assets to pay off as much of your debt as possible and discharge the rest. In doing so, you may be able to pay off your tax debt and resolve your tax lien. The lien will be discharged once your debt is paid, or once all of the property held under a lien is sold.
Chapter 13 bankruptcy cannot resolve a tax lien either, but can be used to satisfy your tax debt, which will result in a tax lien discharge. How much you repay depends on what kind of tax debt you owe.
A tax lien secures your tax debt, meaning it becomes a priority debt – one you must repay through your Chapter 13 bankruptcy plan. However, if you owe any other debts that remain unsecured, you may end up only paying a portion of what you owe through bankruptcy. The rest may be discharged.
Tax Lien vs. Tax Debt
It’s important to separate a lien from your principal debt. The tax lien is one of the methods through which a tax authority might coerce payment, by effectively staking a legal claim on your properties. Your tax debt is what you owe. Under certain circumstances, bankruptcy may resolve a tax lien by satisfying your tax debt through liquidated assets or a repayment scheme.
Remember, a tax lien cannot be discharged through bankruptcy. This is because a tax lien turns your debt into a prioritized and secured debt. If you file for Chapter 7 bankruptcy, for example, you must pay the federal or state tax authority using the proceeds from liquidating your assets.
However, even if your debt remains unsecured, not all tax debt can be discharged. Recent sales tax debt, property tax debt, and trust fund taxes are non-dischargeable, meaning you will continue to owe these tax debts after your bankruptcy has concluded. Furthermore, if you aren’t eligible for discharge, you will still owe income tax debt after bankruptcy if your repayment plan or liquidation did not fully cover your tax obligations.
Eligibility for Tax Debt Resolution Through Chapter 7 Bankruptcy
To resolve your federal income tax debt through Chapter 7 bankruptcy, your debt must satisfy the following conditions:
- You did not willfully evade taxes.
- Your tax debt is attached to a tax return you filed at least two years before you filed for bankruptcy (the return must not have been late).
- Your tax debt itself was due at least three years before you filed for bankruptcy.
- The IRS assessed your income taxes and found the debt at least 240 days before you filed for bankruptcy.
Depending on your circumstances, these can be some fairly steep requirements. However, they are requirements for the discharge of your tax debt. Remember, you can still resolve your tax debt (and, as a result, your tax lien) as part of the bankruptcy process through liquidation or monthly bankruptcy payments.
Other Important Options
Aside from bankruptcy, your other options for permanently resolving your tax debt are limited – to cut to the chase, you need to pay your tax debt. But that does not mean you must pay your debt off all at once.
For federal tax debts, if your tax debt totals $50,000 or less, you are eligible for a streamlined payment plan – this constitutes up to 72 monthly installments from a bank account or source of income of your choice. Streamlined installment agreements do not require a Collection Information Statement and can be set up online via the IRS’ website. Debts of $25,001 or more usually require an agreement for automated withdrawals – for debts under that, you may make manual payments instead, but be careful not to default or miss a payment.
If you cannot manage to pay your debt off within 72 months, you may be eligible for a partial payment plan, or an offer in compromise. These are two different possibilities to resolve at least some or most of your tax debt within a reasonable period, usually five years or less (if your tax debt is about to expire).
For state tax debts, your options differ from state to state. Check with your local state tax authority to review their payment plan options and your possibilities for organizing repayment and resolving or lifting a tax lien.
Note that tax debt resolution does not free you from your continued responsibility to manage your taxes, file your tax returns on time, and pay your due taxes – especially if you are self-employed. Continuing to miss your tax return deadlines will incur additional penalties and a new set of debts. Consider using professional tax preparer services to automate the process and stay on the government’s good side. Can Tax Liens be Wiped Out in Bankruptcies? Contact Rush Tax Resolution today to learn more about how we can help.