Dealing With Tax Liens in Wilmington Bankruptcy Skip to main content

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Dealing With Tax Liens in Wilmington Bankruptcy


Tax lien stress

Stressed over a Wilmington tax lien?

Image by Alex Brisbey via Unsplash

Getting behind on your state and federal income taxes can be stressful. The government has some incredible powers of collection and can attach your wages, personal property, bank account, and more. When you’re late on taxes, one of the most grievous outcomes is a tax lien. If possible, you should deal with your tax trouble before there's a lien.

Let’s dig a bit into what tax liens are and how they work so you have a better understanding of how filing bankruptcy can help.

What’s a tax lien?

Tax debt is unsecured debt because it has no asset attached to it. Secured debt is like a home attached to a mortgage or car loan to the vehicle. Depending on how old the tax debt is, it may be dischargeable through bankruptcy.

If your tax returns were filed on time, if the tax was due for at least three years, and you filed the returns at least two years before filing for bankruptcy, you may be able to discharge the debt through Wilmington Chapter 7 bankruptcy or reduce or discharge it in Chapter 13.

When unpaid income taxes linger, the government can pursue a tax lien that converts the unsecured debt into secured debt. Once the debt is secured, it means that repayment of the debt is attached to your property.

A tax lien can attach to your home, vehicle, or other assets. Then, if you fail to pay, the creditor can legally sell off your property to make good on the debt. Once it gets to the lien stage, it’s much harder to unload unaffordable tax debt.

Income tax lien on a dischargeable tax debt

If you file Wilmington bankruptcy before the IRS records a tax lien, the automatic stay prevents the IRS from pursuing a tax lien against your property. Once there's a tax lien, even if you discharge the tax debt in bankruptcy, the lien still stands.

However, there are still benefits to filing bankruptcy after a tax lien records on dischargeable income tax debt. Chapter 7 bankruptcy makes sense if you have no property that the IRS can use to attach the lien and try to collect the debt.

Tax lien might be less than tax debt

It’s important to understand how liens and back income taxes work. Suppose you owe $15,000 in income taxes, but you own property worth less than $4,000, the tax lien recorded against your property cannot be worth more than its value (the $4k). So, if you file Chapter 7, the entire tax debt may be eliminated (assuming it qualifies for discharge).

That would get rid of the $15k and make it no longer legally collectible. Only the $4k lien would remain. You’d either need to pay the $4k or surrender the asset associated with the lien. In Chapter 13 bankruptcy, your position could be even better.

The automatic stay is longer (three to five-years) and offers flexibility in paying off the debt associated with the lien. If the asset affected by the tax lien has little or no value or equity, you may be in an even better position.

Income tax lien on a nondischargeable tax debt

A tax lien recorded on a nondischargeable tax debt has little difference from a lien on a dischargeable tax debt. Nondischargeable tax debts are those that are more recent or that you filed late returns on or involve other circumstances that disqualify it for bankruptcy relief.

However, lessening other debts using Chapter 7 or Chapter 13 bankruptcy can make it easier to deal with your past-due tax obligations. Regardless of whether the income tax lien is dischargeable or not, filing bankruptcy may help get your finances in order.

To find out more about income tax and bankruptcy, read our client reviews then contact the Law Offices of John T. Orcutt. Call +1-919-646-2654 to schedule a free Wilmington bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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