How Bankruptcy Affects Tax Liens and Repayment Schedules

Taxes take a huge chunk out of our incomes. Some of us might try to mitigate that burden by adjusting our deductions so we get a bigger paycheck. We hope to minimize what we owe at the end of the year through deductions and tax credits, but that gamble doesn’t always pay off, and we end up with a bigger tax bill at the end of the year than we expected. Some of us work for ourselves and fail to pay the appropriate estimated taxes each quarter, which leaves us with a big tax bill at the end of the year.

So what do you do when you can’t pay that huge tax bill? You can negotiate a repayment plan, but you will accrue interest and penalties along the way. If you are experiencing financial problems, you might struggle to pay even this negotiated amount. If you fall behind on your payments, or simply stop making them, you can end up with a tax lien on your property. A lien is a claim against your property, which gives the IRS the right to seize your property to satisfy your debt. A lien is most often placed against your home, but it can also be placed on your vehicle or your personal belongings.

When your finances start to be overwhelming, you might decide to look into filing for bankruptcy. A Chapter 7 bankruptcy filing can wipe out your unsecured debts, if you qualify to file. A Chapter 13 bankruptcy allows you to negotiate your debt so that you make a manageable monthly payment.

Some people think that if they file for Chapter 7 bankruptcy, they can free themselves of their tax debts. However, this is not necessarily true.

Tax Debts in Bankruptcy

You must meet a number of criteria to qualify to file for Chapter 7 bankruptcy. If you qualify, you must then meet additional criteria to have your tax debts eliminated with your AZ bankruptcy filing. Specifically, the criteria for tax debts are:

The debts must be for income tax. You cannot discharge payroll taxes or other types of taxes, nor can you discharge penalties for tax fraud.

The debt must be at least three years old. Recent tax debts cannot be discharged.

You must have filed a tax return. You cannot discharge a debt after the IRS slapped you with a bill after it noticed you never filed your return.

You must have received notice of your tax debt from the IRS at least 240 days before you file for Mesa bankruptcy.

You cannot have committed fraud or tax evasion. These are considered criminal activities, and you cannot discharge debts as a result of them.

If you meet these criteria, you may be able to discharge the debts you owe. If you do not meet these criteria, you will continue to be responsible for paying the full tax debt and any interests and penalties that are assessed. You may be able to negotiate a repayment plan with the IRS to make paying off this debt a little easier. If you have already negotiated a payment plan and then file for Chapter 7 bankruptcy and discharge the debt, you will not have to continue making those payments.

Tax Liens in Bankruptcy

The IRS may have filed a lien against your property if you owed taxes. If there is a lien against your property, filing for Chapter 7 bankruptcy will not remove it. You may be able to have your tax debt discharged in the bankruptcy, but the lien cannot be discharged. The IRS will continue to have that claim against your property.

The only way that a bankruptcy filing can help you with a lien is if you file for bankruptcy before the lien is placed on the property. Therefore, you should act quickly if you have a serious tax debt and are considering bankruptcy.

If a lien is already on your property and you file for Chapter 7 bankruptcy, the property can be sold to satisfy the lien. The situation depends on how much your property is worth, how much you owe on the mortgage, and how much you owe the IRS. For example, if your home is worth $200,000, and you still owe $50,000 on the mortgage and owe the IRS $50,000, the property will likely be sold to satisfy those debts. You get a $100,000 property exemption. However, if you still owed $100,000 on the mortgage, the property would not be sold because it would not leave enough left over after the exemption to pay both lenders.

In some cases, the IRS may not even pursue the lien if it remains after bankruptcy. The value of a home can go up, so it may wait until you pay down the mortgage or the value of the property rises to collect on its lien, depending on how long that would take. But if the lien is on something like a vehicle or personal belongings that will depreciate, it would likely give up its claim since the value of those assets would never end up satisfying the debt.

If you are struggling to pay a tax debt, it’s important that you talk with two professionals: A tax attorney in Arizona from Silver Law PLC and a bankruptcy lawyer. Your tax attorney will audit your return and look for ways to save you money, such as by finding additional deductions and credits. It may be possible to reduce your tax debt or even to eliminate it. However, if that’s not possible, your bankruptcy attorney can help you determine if filing for bankruptcy is the right choice. Your attorney will go over your assets and debts and help you decide the best possible outcome.