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Avoiding Tax Liens In Bankruptcy

If the discharge in the Chapter 7 case eliminates the debtor’s personal liability for the tax year or years for which there is a lien, the lien survives only as a charge on any equity in the property that the debtor owned at the beginning of the case. The lien, though not discharged, does not attach to assets that you acquire after the case is filed. If you do not own any property, or have any personal assets at the beginning of your Chapter 7 case, then very likely the IRS liens cannot attach to anything. Therefore, a motion to determine the value of the lien may be filed with the bankruptcy court and possibly avoid the liens altogether.

Your choices after the discharge are

  • pay the IRS the value of the equity in assets to which the lien attached at the beginning of the case;
  • do nothing in the expectation that the IRS will not attempt to enforce a lien, if the collateral is of little value or is exempt from levy by law;
  • file a Chapter 13 to pay the lien over time if it attaches to assets of significant value.

Liens can be stripped off of the debtor’s assets in  Chapter 13 when there is not enough equity in the asset, after deducting senior liens from the property’s current market value, to secure the unsecured in whole or in part, where the lien exceeds the value of the debtor’s property.

Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured.

In Chapter 11 or Chapter 13, even voluntary liens, such as mortgages and security interests, can be stripped down to the value of the collateral, with the exception of voluntary liens secured only by the debtor’s residence. Unfortunately Congress has thus far failed to change the bankruptcy laws to allowing the modification of home mortgages.

Contrast this procedure to lien avoidance pursuant to § 522, where only judicial liens such as judgment liens or voluntary liens on household goods can be avoided if the property would otherwise be exempt.