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Can Bankruptcy Help With Tax Debt and Tax Liens?

Yes. The general rule is that the tax portion of unpaid state or federal taxes cannot be discharged in bankruptcy. However, there is an exception for taxes that are at least three years old and where the taxing authority has not filed a tax lien. But, even if a debtor is not eligible for the exception, filing for bankruptcy can provide significant relief in several other your tax now here!

These include the following:

  • The automatic stay applies to taxing authorities like any other debt collector -- the automatic stay will stop foreclosures and other collection actions; this can give a debtor "breathing room" to find a solution
  • Reducing or discharging other debt can help a debtor pay off a tax debt/lien
  • Sometimes interest and penalties assessed can be discharged or reduced
  • Under some circumstances, the tax debt amount owed can be reduced

Determining how to best handle tax debt and liens can be complicated, so it is important to consult experienced debt relief attorneys like the ones at Guardian Litigation Group. Here are some important highlights.

As noted, if a debtor files for bankruptcy, the tax amount cannot be discharged unless the debtor qualifies for the exception.

To be dischargeable, the following criteria must be satisfied:

  • Taxes are income taxes
  • Taxes were due more than three years ago
  • The taxes were assessed at least 240 days before the bankruptcy is filed
  • The taxing authority has not filed a tax lien
  • The debtor filed the relevant tax return(s) on time
  • There is no evidence of tax fraud or evasion

But, as noted, even if a given tax debt is not eligible for discharge, filing for bankruptcy can help by reducing other debt, such as credit card debt or unpaid medical bills. Those types of debts CAN be reduced or discharged. Reducing or discharging those debts can free up monthly income to help the debtor pay off a tax debt/lien.

Filing for bankruptcy may help in other ways. For example, many times interest and penalties on taxes owed can be reduced or discharged in bankruptcy, but not always. Two key factors are whether the debtor filed his or her tax returns on time and whether or not the taxing authority has filed a tax lien. Late-filed tax returns or the existence of a tax lien will typically prevent a debtor from reducing or discharging interest and penalties.

Why Does a Tax Lien Matter?

Under the Bankruptcy Code, debts that are secured by a lien are treated differently than other types of debt. For example, many debtors have automobile loans that are secured -- collateralized -- by the automobile. By contrast, most credit card debt has no collateral to secure payment of the loan. In general, secured loans must be paid in full. Thus, when a taxing authority files a tax lien, then the tax debt is now a secured debt.

That being said, a secured debt is only secured up to the value of the asset which collateralizes the debt. Anything above that value is unsecured debt which, under some circumstances, can be discharged. For example, if there is a tax lien for $100,000 against the debtor primary residence, but the debtor only has $40,000 in equity in the property, then the tax lien applies only to the $40,000 in equity. The remaining $60,000 tax debt might be dischargeable. This is why, under some circumstances, the tax amount that is due can be reduced in a bankruptcy.

As can be seen, the legal rules concerning tax debts and tax liens can be quite complicated. But, depending on the debtor’s individual circumstances, filing for bankruptcy might be a viable option to obtain relief.

Contact an Experienced Debt Relief and Debtors’ Rights Attorney

For more information, contact the Debtors’ Rights attorneys at Guardian Litigation Group. We can help if you think bankruptcy is the right option and we can help explore your options if you have a tax debt and/or lien. We have the tools and experience you need. Our mission is to provide unparalleled legal services and support for those being crushed by their debts and harassed by their creditors. We can be reached via our contact page or by phone at (949) 312-4226.