Try to file bankruptcy before an income tax lien gets recorded. But if you can't, here are the effects of a tax lien under Chapter 7 and 13.
Chapter 13 gives you huge advantages for paying off your priority income tax debts. You're protected while you pay what you can afford.
Priority debts are largely unaffected by a Chapter 7 case--it does not discharge them, so you need to pay them after finishing your case.
Your Chapter 7 trustee may pay your priority debts--in full or in par--through the proceeds of the sale of your unprotected, not exempt assets.
One of the most important aspects of bankruptcy is that all debts are not equal. "Priority" debts are treated special in a number of ways.
Your debts are either secured by something you own, or they are unsecured. Unsecured debts are either "priority" or "general unsecured."
Usually you can discharge--write off--an income tax debt by just waiting long enough. Here's how to discharge a tax debt under Chapter 7.
Chapter 13 is very different from Chapter 7 "straight bankruptcy." It buys you time to deal effectively with your special debts.
Priority proofs of claim need to be carefully monitored in a Chapter 13 case. Make sure one's filed so it gets paid, and at the right amount.
Here's what happens to "priority" debts in an "asset case."
What makes "priority" debts so special?
Because of Chapter 13's much more powerful automatic stay, its ability to prevent judgment liens and tax liens is extremely valuable.
A tax lien fully encumbered by the equity in your home is dangerous. Chapter 13 may be your best option.
Chapter 13 forces the IRS/state to accept only partial payment on an income tax debt that is only partially secured by a tax lien.
Once an income tax lien is recorded, Chapter 13 gives you a tool that may enable you to pay no more and yet get a release of that tax lien.