Will IRS Liens Stop During Bankruptcy?

Many elements to a bankruptcy can be quite complex and often require an understanding of legal, financial, and even tax implications, including the requirements of IRS liens. These liens are the result of unpaid tax debts and are the first step to the IRS seizing property to pay those debts. In fact, a tax lien takes priority over any other lien on real property and may diminish the value of a mortgage on someone’s home. For that reason, a mortgage holder may pay a tax lien and demand or include the payments for that tax lien in the remaining mortgage payments. If a tax lien is not paid within the specified period of time, the holder (government) may claim the property or sell the lien to another party, giving them the option to seize the property.

Tax Liens and Bankruptcy

When someone files for bankruptcy, the automatic stay on all collection efforts applies to tax debts as well as all others. While the petition is being processed, the government does not have the right to pursue collection of that tax debt. The debtor may be able to protest the tax debt in bankruptcy court and if they win, the tax debt may be dismissed. However, if the tax lien remains after the bankruptcy, even if the tax debt is dismissed, the lien will stand, and the government could still have the option of seizing the property to claim the money they are owed.

Several conditions must exist before a tax debt can be dismissed in bankruptcy:

• The tax debt must have occurred on a tax return due 3 years or more before the bankruptcy petition

• The return recording the debt must have been filed 2 years or more before the bankruptcy petition was filed

• The tax bill must have been assessed by the IRS 240 days or more before filing

• There is no evidence of fraud or tax evasion

• Only income taxes qualify for bankruptcy discharge

Getting Legal Help with Tax Liens and Bankruptcy

These requirements for obtaining a discharge of tax debts during the bankruptcy process are complicated and demanding. In some cases, they may cause more difficulty than benefits. It is important to talk to a bankruptcy attorney to learn how tax liens will affect a bankruptcy petition before deciding to file. Those hoping to save their home through filing bankruptcy may wish to talk to a lawyer to learn how a tax lien will affect their property title even after the bankruptcy is complete.