You owe taxes to the Internal Revenue Service (IRS). To make matters worse you find out the IRS has placed a tax lien on your property with the county recorder’s office. What can you do? Is the tax lien dischargeable in bankruptcy?
Under 11 U.S.C. §§507 and §523, the following taxes are dischargeable in bankruptcy if:
1) The return was last due at least three years before the bankruptcy petition was filed;
2) The tax claim was assessed within 240 days before the date of the filing of the petition;
a) If you have requested an offer in compromise related to the tax you are trying to discharge, the time it takes the IRS to consider the offer in compromise is not counted towards the 240 days. In fact, the IRS adds another 30 days on top of the time it takes for the IRS to make a decision. This means that if you submitted an offer and compromise to the IRS and they rejected the offer in compromise 3 months later, the 240 days assessment period does not include the 4 months (3 month consideration period plus an additional 30 days).
b) If you have filed a previous bankruptcy case, the 240 days assessment period does not include the time you are in bankruptcy and it adds another 90 days on top of that time. So if you filed for a Chapter 7 bankruptcy case previously and it was closed 3 months later, the 240 days assessment period does not include the 6 months (3 months in bankruptcy plus an additional 90 days).
3) The tax return was filed more than two years before the bankruptcy petition was filed;
4) The tax return was not fraudulent or there was no willful attempt to evade the tax.
These rules do not apply if there is a tax lien placed on your property. A tax lien is not dischargeable in bankruptcy. If you own real property the IRS may record a tax lien on the title. If you do not own any real property, the IRS may place a lien on all your personal property.
If You Own Real Property
If the tax lien was recorded on your real property, your personal obligation to pay the debt may be wiped out in the bankruptcy if the income taxes meet the rules listed above. However, even though your personal liability is discharged when filing bankruptcy the tax lien would remain recorded against your property until the tax lien is released. This means if you try to sell your house when the tax lien is still recorded against your property, you will have to pay off the IRS lien in the sale of your home.
If You File Chapter 7 Bankruptcy and You Do Not Own Real Property
If you do not own any real property in a Chapter 7 bankruptcy then the tax lien only attaches to your personal property. Your obligation to pay the tax debt may be wiped out in the bankruptcy case if the income taxes meet the rules above. However, the tax lien would still survive the bankruptcy and the lien remains recorded against all the assets you have owned on or before the date your bankruptcy petition was filed. Fortunately the IRS cannot go after income or assets you acquire after the date you have filed for bankruptcy protection. They can only go after the assets that you have owned prior to filing for bankruptcy. This means the IRS can only repossess the furniture or cars that are paid in full or other personal assets you have owned prior to the bankruptcy filing. Chances are the IRS will probably not come to your door to collect your 20 year old couch because it would be a waste of time for the IRS. The IRS may potentially go after your retirement plans as well since the retirement plans were excluded from the bankruptcy estate. However, they cannot go after your retirement plans until you retire and are eligible for retirement income. By that time, the tax lien may have expired.
If You File Chapter 13 Bankruptcy and You Do Not Own Real Property
So what happens if you are in a Chapter 13 bankruptcy plan and you owe income taxes for both 1) tax years that would have otherwise been eligible for discharge if the rules above are met and 2) recent tax debt that is not eligible for discharge? In a Chapter 13 bankruptcy case, your recent tax debt is considered a priority unsecured debt, and they must be paid in full through your Chapter 13 bankruptcy plan. The other income tax debt that would normally have been eligible for a discharge but for the tax lien is secured up to the amount of assets owned and that amount needs to be paid in full through the Chapter 13 plan (for example, if you have $25,000 of personal property, including cars, bank accounts, furniture, etc., then the $25,000 would need to be paid in the Chapter 13 plan in addition to the priority unsecured debt). The remaining tax debt from the tax lien is treated as an unsecured debt that is discharged in the bankruptcy, but as indicated above, the tax lien still survives the bankruptcy. Therefore the remaining tax debt subject to the tax lien is treated the same as in the Chapter 7 bankruptcy case above. The IRS will still retain the IRS lien on your personal property but they cannot go after income or property you acquire after your bankruptcy case was filed.