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A recorded tax lien on a tax that already doesn’t qualify to be discharged makes you all the more want to pay that tax. Chapter 7 might help.

We’ve been talking about the effect of a tax lien on an income tax that bankruptcy CAN discharge. A tax lien can turn that tax from one you don’t have to pay into one you have to pay in full. That’s because a tax lien recording turns an unsecured debt that bankruptcy can write off into a secured one. The tax becomes secured by your real estate, or your personal property, or both. So, if you want to keep what you own, you must pay the tax.

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Chapter 13 protects you from a recorded tax lien in crucial ways, and can reduce how much you pay on the underlying dischargeable tax debt.

Last week’s blog post was about dealing with a recorded tax lien by filing a Chapter 7 “straight bankruptcy” case. Usually the IRS’ or state’s recording of a tax lien against you effectively requires you to pay the underlying tax. That’s true even if that tax otherwise qualifies for total discharge—legal write-off in bankruptcy. That’s because a recorded tax lien converts that tax debt from being unsecured to being fully secured by your property and possessions. You pay the tax—sooner or later—to avoid losing what you own.

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Under certain circumstances a recorded tax lien does NOT require you to pay a dischargeable tax after Chapter 7, or at least not in full.

The last two blog posts have been about the benefits of preventing an income tax lien recording by filing bankruptcy. That’s especially helpful if the tax at issue is an older one that can be discharged—legally written off. The recording of a tax lien can turn such a tax debt from one you don’t have to pay at all into one that you have to pay in full. (See the IRS Notice of Federal Tax Lien form.)

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Chapter 7 and 13 can both prevent the recording of a tax lien. But if the tax qualifies for discharge Chapter 7 is quicker and less risky.

Last week we showed how detrimental the recording of an income tax lien can be for you. It can turn a tax that you could fully discharge (legally write off in bankruptcy) into one you’d have to fully pay. We showed how Chapter 7 “straight bankruptcy” could prevent recording of the tax lien and could discharge the tax.

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The recording of a tax lien often immediately turns an unsecured debt into a secured one, forcing you to pay what you could have written off.

If you owe income taxes, stopping the IRS or state record a tax lien can be a huge benefit of filing bankruptcy. How much of a benefit turns on details about the taxes you owe and the type of bankruptcy you file. Today and in our next blog post we’ll look at income taxes that would be discharged (forever written off in full). Today we focus on the benefits of filing Chapter 7; next week we’ll do the same for Chapter 13.

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210-342-3400

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