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Tax Season: When It’s Important to File Bankruptcy Sooner Rather Than Later–Tax Liens

A tax lien recorded before you file bankruptcy can force you to pay taxes you could otherwise not pay. You can prevent that lien recording.


Bankruptcy can prevent one of the most dangerous actions that a creditor can take against you. This action is so dangerous not because of its immediate effect—like a garnished paycheck or repossessed vehicle—but rather because of its very expensive permanent effect.

The recording of a tax lien by the IRS (and/or state taxing authority, where applicable) is so potentially expensive because it can convert a tax debt that would have been discharged (permanently written off) into one that you have to pay in full. That can mean the difference of thousands of dollars (or sometimes even tens of thousands of dollars).

More than just costing you lots more money, this conversion of a debt that could have been discharged into one that has to be paid could also very likely push you from filing a Chapter 7 “straight bankruptcy” that could be completed in just 3 or 4 months into a Chapter 13 “adjustment of debts” that could very well take as long as 5 years.

How the Recording of a Tax Lien Causes So Much Damage

A tax lien causes the most damage when you have a combination of two circumstances that are common if you owe taxes:

  1. An income tax you owe meets the conditions for being able to be discharged in bankruptcy. A tax can be discharged in most situations if more than 3 years have passed since the tax return for that tax was due, and if more than 2 years have passed since the tax return was actually filed.
  2. You own assets—home, vehicle, a retirement account, furniture, appliances, other household goods or personal effects—that a tax lien could attach to.

Tax Liens Tend to Be Recorded Against Debts that Would Be Dischargeable

As to the first of these two conditions, the IRS and the state tax authorities are not all that fast about recording tax liens. They tend to (although not necessarily!) go through other collection efforts beforehand, with the result that by the time they do record the lien enough time will often have passed to meet the 2 year/3 year conditions for discharging that tax. So when a tax lien is recorded against you, it usually hurts.

You Almost Always Have Assets That a Tax Lien Attaches To

As to the second condition, you may think you don’t own much, so that an income tax lien would have nothing to attach to. You may have even found out that everything you own is “exempt”—that it’s all covered by property exemptions, protected for bankruptcy purposes. If so, that means that your bankruptcy trustee cannot reach any of your assets on behalf of your ordinary creditors.

Unfortunately, the IRS and/or the state are not ordinary creditors. Property exemptions do NOT protect your property from recorded tax liens. Anything you own, anything you have equity in today is subject to a tax lien.

This is particular dangerous as to your home and your retirement funds. Homestead exemptions often protect all equity in a home. But a tax lien defeats a homestead exemption. Retirement plans of virtually any type are protected in bankruptcy. But again tax liens attach to retirement funds regardless of the usual protections.

When These Two Common Conditions Apply

The recording of a tax lien converts a tax debt that could have been discharged without paying anything on it into a debt secured by virtually everything that you own, including your home, vehicle, retirement funds, etc. As a result, instead of being free of that tax debt, you are forced to pay that tax in order to prevent the IRS/state from taking what you own.

How This Can Be Prevented

All this can be avoided by simply filing bankruptcy before the tax lien attaches. If you file either Chapter 7 or 13 BEFORE a tax lien is filed against you, the IRS and/or state are stopped from filing one. Then if your bankruptcy case discharges the tax, the taxing authority cannot file a tax lien AFTER the bankruptcy case is over.  

So, especially if you owe an older income tax debt, one that may be dischargeable, filing the bankruptcy case BEFORE the taxing authority files a tax lien can make all the difference.  The difference can be between paying NOTHING on a tax debt because that debt is discharged in full vs. paying ALL of that tax because the lien attached to equity in your home, retirement, or other asset. 


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