Tax Liens for unpaid back taxes can be pretty scary. If you have received a notice then it is probably best to speak to an attorney about how to handle your Tax Liens. There are several ways to deal with Tax Liens – Bankruptcy being only one of them.
I STRONGLY recommend you contact a bankruptcy attorney when dealing with federal tax liens. Again, the below information is not legal advice, and is intended for informational purposes only.
FEDERAL TAX LIENS IN A CHAPTER 7
As mentioned, things get very tricky when dealing with federal tax liens. The main problem is that this type of IRS debt is technically secured debt. By operation of law, the IRS has a lien on all property of the debtor whenever a tax liability is created, the government makes a demand for payment, and you don’t pay. The IRS has only one exemption, and that is household furnishings – other than that, the IRS can grab anything you have. The lien exists regardless if the IRS files a Notice of Federal Tax Lien – however, to “perfect” that lien against certain types of assets (i.e. real estate) the IRS must file a Notice of Federal Tax Lien. All the notice does is put the IRS in 1st place over certain creditors, but the lien exists and is created by statute.
Whether this is an issue for you depends on whether you have any assets. In a zero asset case, this may not be a big concern; however, if you own a house, this tax lien becomes problematic. The reason is that a Federal Tax Lien is just like any lien – whether you file a Chapter 7 or Chapter 13 Bankruptcy – a lien must be paid back if you want to keep the collateral. So, if you owe the IRS $15,000 and have $25,000 in home equity, the IRS can foreclose that lien after your Bankruptcy discharge even if the underlying tax debt is dischargeable. That said, the value of the lien can be established at the time the Bankruptcy petition is filed. To understand what this means – read on.
In the current real estate market, many homes have dropped significantly in value leaving owners with greatly reduced, zero or even negative equity. Let’s say you owe the IRS $15,000 but only have $5,000 in home equity at the time you file your Bankruptcy petition (the equity is Fair Market Value and there are superior liens to IRS such as your mortgage). You can do what is called a “quasi lien strip” to reduce what you owe the IRS.
QUASI LIEN STRIP IN A CHAPTER 7 BANKRUPTCY
To do a quasi lien strip, you need to file a Motion to Determine Value of Lien with the Bankruptcy court. This starts an adversarial proceeding. The reason to do so is to establish the value of the IRS’s lien. The goal is to establish that the lien has zero or very little value. If there is no value to the home, then the lien attaches to no value and you can extinguish the lien. In the prior example, let’s assume a successful adversarial proceeding: If the underlying taxes owed ($15,000) were dischargeable taxes (non-priority), and the Bankruptcy court established the new lien value at $5,000 (or whatever equity are in assets that are PART OF the Bankruptcy Estate), then you would only need to pay $5,000 to satisfy the lien.
If an adversarial proceeding is not used to establish the value of the lien, two things happen: 1) The IRS has a lien for the FULL amount of the tax liability, regardless of the value of your assets that are part of the bankruptcy estate, and 2) that lien survives the Bankruptcy even though the underlying tax is discharged as to you personally. In this way, the IRS debt is no different than a non-reaffirmed mortgage – you have discharged your personal responsibility to pay the debt, but your assets (i.e. home) remains liable.
FEDERAL TAX LIENS IN A CHAPTER 13
A Chapter 13 Bankruptcy may be the simplest way to handle Tax Liens. You can set up a payment plan to pay back the secured Federal or State tax liens based on the value of your assets. You may even have an opportunity to satisfy the tax liens on your property for less than you could outside of bankruptcy.
To Learn More About Tax Liens, Call Chris W. Steffens, a Kansas Licensed Bankruptcy Lawyer