Tax Liens

Tax Liens for unpaid back taxes can be pretty scary. If you have received a notice of Federal Tax Lien, then you may want to speak to an attorney about how to handle your Tax Liens. Chapter 13 Bankruptcy offers one solution.

What is a Tax Lien?

The IRS definition for a tax lien states: A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.

The IRS goes on to state that a tax lien exists after the IRS makes an assessment of your liability or sends a Notice and Demand for Payment and you subsequently neglect or refuse to fully pay the debt in time.

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 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.

Reduce Tax Liens in Chapter 13 Bankruptcy

A Federal Tax Lien can prevent an otherwise dischargeable tax debt from getting wiped out in bankruptcy. A tax lien expires after 10 years; however the IRS will generally refile the lien to renew their claim. Chapter 13 offers some benefits over a Chapter 7 (which the Tax Lien passes through untouched).

A Chapter 13 Bankruptcy will allow a Debtor to pay the priority portion of the tax lien in full and pay the non-priority portion equal to the value of the assets the lien secures. Below is a quick example:

Suppose the IRS filed a $20,000 tax lien for the tax years 2019, 2018, 2017 and a $30,000 tax lien for the tax years 2016 and 2015. The Debtor has a net worth of about $10,000. The taxes owed for 2017 – 2019 are considered Priority and must be paid back in Chapter 13. Absent a tax lien, the 2015 & 2016 taxes would generally qualify for a discharge in Chapter 7 or Chapter 13 Bankruptcy (assuming all the conditions are met).

In the above example, the Priority taxes would be paid back in a Chapter 13 Bankruptcy in full ($20,000) at zero percent interest. The remaining non-priority tax portion would be paid back according to the value of Debtor’s assets ($10,000). The total amount to be paid to satisfy the tax liens in Chapter 13 is $30,000 vs the full amount $50,000 after a Chapter 7 discharge.

Advantages of Chapter 13 vs Chapter 7: It Depends

Chapter 13 Bankruptcy can offer significant advantages over Chapter 7 given the right circumstances. For Debtors without many assets (i.e. a small net worth), Chapter 13 may be an excellent way to reduce Federal Tax Liens. For Debtors with a large net worth in relation to the amount of taxes owed – it might not make as much sense.

If you have questions about Taxes or Tax Liens, please give us a call at 785-727-7700 for a FREE Consultation over the phone, in person or you can email us now.