Last week we discussed the basic requirements of discharging tax debt in bankruptcy. This week I will discuss tax liens and how they are treated in bankruptcy. Tax liens, like generally any other kind of perfected lien, will run with whatever the lien is attached to. The most common types of liens are real property liens and car liens. A lien is nothing more than a way to insure that the debt is paid in full. If you do not pay the loan then the person holding the lien gets to repossess or take whatever property the lien is on.
A tax lien operates much the same way. The tax lien will attach to all your assets and is typically accomplished by the taxing authority filing a notice of tax lien with the registering authority where the asset(s) is located. Tax liens are not the end of the world and alternative arrangements can be made with the taxing authority if a tax lien is filed. However, the easiest way to remove a tax lien is always to pay the tax debt. While the IRS is currently not overly aggressive with filing tax liens on personal income tax situations that does not mean they will not. In addition, the individual states tend to be more aggressive.
Under the Internal Revenue Code, a tax lien is automatically in place when the tax is assessed by the IRS, demand for payment is made, and the tax remains unpaid. As a consequence, if the tax is assessed before the bankruptcy petition is filed, that lien will survive the bankruptcy discharge and will remain attached to the pre-petition asset just like a second mortgage debt remains attached. Assuming that the tax debt is dischargeable, if the tax was assessed and the lien attached before filing, the discharge would remove the IRS' ability to seek payment from you personally but the IRS would be able to recover payment of their debt from the equity in your assets. The pre-petition lien has no impact on assets acquired after the bankruptcy petition is filed.
While some of your assets may be protected from a federal tax lien based on the federal property exemptions, the general state bankruptcy exemptions will not necessarily apply. The best course of action in these circumstances is to contact the IRS official in charge of your case and make some sort of settlement arrangement with the IRS after bankruptcy. After all, that tax lien will make it hard for you to sell your house or car.
In part 3 of this series I will discuss what types of tax debt are not discharged in bankruptcy.