Can Filing For Bankruptcy Help Me With a Tax Lien?

In our last blog, we talked about how filing for bankruptcy can actually get rid of some of your taxes. But what if the taxes that would be discharged in your bankruptcy already have a lien filed against you? Would you believe you may still be able to get most of your tax lien debt discharged also? Let us take a look at this issue.

I had a case a couple years ago in which my client had several tax liens filed against him. The taxes were old enough that they would be discharged in a bankruptcy. However, my client wanted to keep his house which had the tax liens on it. I had to figure out how to save his house without having to pay back all the tax liens. So what do you need to understand about tax liens so you will be successful in a chapter 13 Bankruptcy?

First thing that you need to understand about Federal Tax liens is that they are a lien against all property. That would be real and personal property. However in order for a Federal Tax lien to attach to real property, it needs to be filed in the county the real property is located.

Tax liens also apply to ERISA qualified pension plans. Even lawsuits you may have outstanding are subject to tax liens. So if you have a personal injury suit, guess what? The award can be used first to pay your federal taxes.

Tax liens also apply to all property acquired after the tax lien arises. Tax liens also follow taxpayers who move from one state to another state.

Tax liens also apply to all exempt property in a bankruptcy.

Tax liens also cannot be avoided in bankruptcy.

So what priority does a tax lien have with other liens on the property? The priority follows the principle of "first in time, first in right". So if there is already a mortgage on the property or a judgment lien from another creditor, the tax lien is third in priority.

Now, what do you do if you have a tax lien on your house and you are in a chapter 13? What did I do for my chapter 13 client mentioned above who had several tax liens on him and he had a house.

I had to first value his entire real property and personal property. I then calculated how much equity in his house the tax lien applied to. Since he already had 2 mortgages on his house and they ate up the equity in his house, I calculated that the tax liens only applied to his personal property.

I added up the value of his personal property without deducting the exemptions. I then filed an objection to the IRS proof of claim claiming that the tax liens are only secured to the value of his personal property which was approximately $6000. The IRS then amended their proof of claim to show there was only $6000 of secured tax liens and I withdrew my objection to the proof of claim. The case was confirmed and my client is on his way to being debt free at the end of his chapter 13 case.

As you can tell, tax liens can be dealt with in bankruptcy.

If you have tax liens on your property, you need to consult an experienced bankruptcy attorney. We have offices available in Akron, Canton, Wooster, and New Philadelphia.

Submitted 1/22/2015