Liens in Bankruptcy

While an underlying debt may be discharged, a lien survives the bankruptcy unless additional steps of taken to avoid the lien. In some cases, a lien cannot be avoided and therefore the lien remains about the bankruptcy is discharged. A common example of a lien that cannot be avoided through the bankruptcy is a tax lien. A tax lien can be put again your real or personal property for a tax debt owed to either the State or to IRS. Where the amount owed is a significant amount, they protect themselves by placing a lien on your property. The liens usually are valid of 10 years and can be renewed one additional time if the State or IRS so chooses.

What does the lien mean for me if I file bankruptcy?

If you file bankruptcy AND the underlying tax debt is discharged then the IRS or State cannot attempt to collect from you personally. This means they cannot take tax refunds, garnish wages, freeze bank accounts etc. However, what they can do is collect from any proceeds of the property if sold. For example, you have a home that the IRS has a lien on for $10,000. You file bankruptcy and the underlying tax debt is dischargeable so they stop garnishing your wages but then you sell your house. Before you would see any proceeds from the home, the IRS would get paid their $10,000.

How do I know if the underlying tax debt is dischargeable?

There are pretty specific rules on discharge of taxes. While I hope this can be a guide, this should not be taken as stating whether your specific taxes are discharged. In order to be sure you should consult with a bankruptcy attorney before assuming your taxes will be discharged.

The general rules are as follows. The taxes must be:

  • From a tax year MORE than three (3) years ago
  • Filed more than two (2) years ago
  • Assessed more than 180 days ago

In determining whether MORE than 3 tax years have passed, you must look at which years taxes have already become due. For example, on January 1, 2013 you may think 2009 taxes are more than 3 years ago but that would be incorrect. Because 2012 taxes are not due until April 15, 2013 the 3 non dischargeable tax years are 2011, 2010 and 2009. After April 15, 2013 when 2012 have now become due then 2012, 2011 and 2010 become the years that are not discharged.

Again, this can be a complicated issued and should be discussed with an experienced bankruptcy attorney prior to any decisions being made.