Will Bankruptcy Stop Tax Liens?
Tax liens are a brutal tactic used by tax agencies to collect past taxes. In this article, we cover the question of will bankruptcy stop tax liens?
Will Bankruptcy Stop Tax Liens?
Bankruptcy is the do over tactic for many Americans. They get up to their eyeballs in debt, often credit card debt, and seek to wipe the slate clean. This used to be a fairly simple process, but bankruptcy laws have been tightened up over the years. It is no longer a piece of cake to just walk away from your debts. Bummer, eh?
Tax liens are used by tax agencies to secure a claim for past taxes. The most common tactic is place tax liens on real property, to wit, homes. The tax lien, however, only applies to the equity on the property. It does not jump in front of the mortgage or other liens already on the property. Let’s look at an example.
Need Help with IRS Problems?
Click Here To Talk to a Tax Professional
Assume you own a home worth $300,000. Assume further that you have a $450,000 mortgage on it. Now throw in the fact the IRS claims you owe $60,000 in back taxes. If the agency files a tax lien against you, it can only attach the $50,000 in equity you have. In short, the tax lien will be secured in the amount of $50,000 and unsecured in the amount of $10,000. If the home is sold, the mortgage is paid off and the IRS gets $50,000. You still owe it $10,000.
So, will bankruptcy stop tax liens? This is a common thought for many people in trouble with the IRS. The answer is dependent on the specifics of your case. Of course, you don’t want to hear that, so let’s talk generalities. In general, the portion of the tax lien that is not secured may be discharged in bankruptcy.
Will bankruptcy stop tax liens in our previous example? In general, it will stop part of the lien. The $50,000 secured portion of the tax lien would survive bankruptcy. The $10,000 unsecured portion will not. Regardless, you still lose the house!
There is a huge caveat when considering if bankruptcy will stop tax liens. Bankruptcy is a federal law, but it is interpreted in concert with state laws. As a result, some states may have laws that can be used to make a bigger dent in tax liens. Florida is known for having strong laws that protect home ownership. You should consult with a tax professional on the issue to learn more about how such laws work in your state and apply to your situation.