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Do Tax Liens Survive Bankruptcy?

When debtors are struggling to put food on the table and keep a roof over their head, they often don’t have the funds to pay Uncle Sam. When they’re looking for long-term financial solutions, they’re often curious about tax liens and how filing for bankruptcy would affect such liens.

What You Should Know About Bankruptcy & Taxes

If you’re a home owner and you fail to pay your taxes, the government can put a tax lien on your property. If you sell your property, the IRS or the local taxing authority has a claim on the amount you receive from the proceeds of the sale.

After a bankruptcy discharge, the IRS can still foreclose on the lien, thereby forcing you to sell the property. Once the mortgage is paid off, the IRS has a claim on any remaining equity.

While the tax lien may survive the bankruptcy, it will only be up to the value of the equity in the property. In that case, filing a Chapter 13 may be beneficial for a filer who wishes to defeat the tax lien.

Let’s say that a debtor files Chapter 7 bankruptcy. Even if the debtor’s tax debts are discharged through the Chapter 7 bankruptcy, if the IRS placed the lien on the property before the debtor filed bankruptcy, the lien is likely to survive the bankruptcy.

However, tax liens are often reduced significantly during a bankruptcy. For example, if the IRS placed a lien on a home that was worth $100,000 but the debtor had $5,000 in equity, the lien would only be worth $5,000.

For more information about eliminating tax liens through Chapter 7 and 13 bankruptcies, contact a York bankruptcy lawyer from Dethlefs, Pykosh, Shook & Murphy Law for a free case review.