Getting Rid Of Tax Liens After Bankruptcy

10 Sep Getting Rid Of Tax Liens After Bankruptcy

The tax may be discharged but thetax liens live on after bankruptcy.

One of the basic principles of bankruptcy law is that the bankruptcy discharge eliminates personal liability, but absent a court order avoiding the lien, it survives the bankruptcy.

That means that the assets to which a lien attaches continue to be burdened with that lien after a Chapter 7 bankruptcy.

While the creditor who holds the lien cannot sue you or claim a lien in assets you acquire after the bankruptcy, the lien on things you owned at filing remains. So what’s a newly discharged debtor to do about a tax lien?

You have choices.

Do nothing

A properly perfected tax lien attaches to everything you own, down to the dirty socks and your outdated cell phones.

The first question is whether you care that there’s a tax lien.

The lien doesn’t attach to the new socks you buy after bankruptcy, and the “stuff” you had at filing may all have little value and no appeal to the IRS. Who cares if there’s a tax lien?

The passage of time may make the lien irrelevant. The collateral wears out and is discarded.

The lien expires 10 years from the date the tax was assessed. The IRS isn’t really interested in dirty socks.

Time will heal this wound. You don’t have to do anything.

Pay off the lien

Maybe it is important to you to get the lien released, and out of the public record.

Perhaps you expect to apply for credit before the lien would otherwise expire.

You may want to pay off the lien. The amount to pay off the lien is related to the value of the “stuff” to which the lien attached. The payoff amount is not the sum of the taxes that were due; it’s only the value of the collateral subject to the lien.

The best evidence of the value of your “stuff” is the bankruptcy schedules that you filed under penalty of perjury, in which you estimated the value of your assets. So, it is important to think ahead when preparing your bankruptcy papers.

Resist the temptation of overstate the value of your “stuff” in the marketplace.

The IRS has a publication on who and how to contact them to get a tax lien released. Make them an offer for the release of the lien.

Note that the IRS will issue the release. It’s up to you to record it in the public record.

File Chapter 13

If the tax lien attaches to something of significant value that may gain value rather than lose value over time, you can consider Chapter 13 to pay off the tax lien over 3 to 5 years.

A Chapter 20 (a 7 followed by a 13=20) is an accepted way to satisfy the lien through the plan.

You might choose a second bankruptcy case where the amount to satisfy the lien is greater than you can write a check for in a single payment.

You choose

Figure out whether it’s worth paying more money for the early release of a surviving lien. If not, let sleeping tax liens lie.


Image courtesy of Flickr and terremonto.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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