Can Tax Liens Be Wiped Out In Bankruptcies?
What is a Tax Lien?
A tax lien is a legal claim that the Internal Revenue Service or state government can place against a property. This lien gives the government a legal right to the proceeds from the sale of the property, or it can be used to collect delinquent taxes from the taxpayer. If a taxpayer fails to pay taxes owed, the government can place a lien on the taxpayer’s property, including their home, car, savings account, and other assets. This lien prevents the taxpayer from selling the property until the debt is paid.
Can Tax Liens Be Wiped Out in Bankruptcies?
In some cases, a tax lien can be wiped out in a bankruptcy. This is known as “lien avoidance” and it is one of the ways a taxpayer can reduce their debt burden. When a lien is avoided, the taxpayer is no longer liable for the outstanding taxes. This means that the government cannot come after the taxpayer’s property to collect the unpaid debt. However, the lien avoidance process is complicated and the taxpayer must meet certain criteria in order to be eligible.
What Factors Are Considered When Determining Eligibility?
The first factor that is considered when determining eligibility is the type of bankruptcy the taxpayer is filing for. The lien avoidance process is different for each type of bankruptcy. For example, in a Chapter 7 bankruptcy, the taxpayer must prove that the lien is an “unsecured” debt. This means that the taxpayer must prove that the government does not have a legal right to the proceeds from the sale of the taxpayer’s property. In a Chapter 13 bankruptcy, the taxpayer must prove that the lien is “invalid” or “unenforceable” in order to avoid it.
What Are the Benefits of Lien Avoidance?
One of the main benefits of lien avoidance is that it eliminates the taxpayer’s liability for the unpaid taxes. This means that the taxpayer does not have to worry about the government coming after their property in order to collect the unpaid debt. Additionally, it can free up the taxpayer’s money and assets so that they can pay off other debts or invest in their future. Finally, it can help the taxpayer rebuild their credit, as the unpaid taxes will no longer be reported to the credit bureaus.
What Are the Drawbacks of Lien Avoidance?
One of the drawbacks of lien avoidance is that it does not eliminate the taxpayer’s obligation to pay the taxes. The government will still expect the taxpayer to pay the unpaid taxes, and they may pursue other methods of collection, such as wage garnishment or bank levies. Additionally, the lien avoidance process can be complicated and it is not always successful. Finally, it can take a long time for the lien to be removed from the taxpayer’s credit report, and this can have a negative impact on the taxpayer’s credit score.
Conclusion
In conclusion, it is possible for a tax lien to be wiped out in certain types of bankruptcies. However, the process is complicated and the taxpayer must meet certain criteria in order to be eligible. Additionally, there are drawbacks to lien avoidance, such as the government’s continued expectation for the unpaid taxes to be paid and the potential negative impact on the taxpayer’s credit score. If you are considering filing for bankruptcy and want to know if you are eligible for lien avoidance, it is important to speak to an experienced bankruptcy attorney.