How Does Bankruptcy Affect Tax Liens and Levies?

 Posted on February 28, 2022 in Bankruptcy

There are multiple types of debts that can cause a person and their family to experience financial difficulties. Tax debts can be especially problematic since debtors are not always able to eliminate these debts through bankruptcy. Taxpayers will want to understand their options in situations where the IRS or a state takes action to collect taxes that are due. By understanding how IRS tax levies and tax liens are affected by a bankruptcy case, a person can make sure they take the correct steps to receive the debt relief they need.

What Is a Tax Levy?

When a taxpayer owes taxes, the IRS may take multiple different types of actions to collect these debts, and these actions are known as tax levies. The IRS may contact a person’s bank and seize the funds in an account, or it may put an order in place to garnish the person’s wages. However, if a taxpayer files for bankruptcy, the automatic stay in their case will apply to tax levies, and the IRS will be required to cease these collection activities while the case is ongoing.

In some cases, bankruptcy may be able to eliminate tax debts. Generally, tax debts are dischargeable if at least three years have passed since a tax return was due and at least two years have passed since the tax return was filed. A taxpayer must have filed all required tax returns for the previous four years. If a person files for Chapter 7 bankruptcy, applicable tax debts may be discharged once their case is completed. If they file for Chapter 13 bankruptcy, tax debts may be included in their repayment plan, allowing them to pay off what is owed along with other debts.

What Is a Tax Lien?

If tax debts go unpaid, the IRS may place a tax lien on a taxpayer’s property, including their home, vehicles, financial assets, or other personal property. This will give the IRS an interest in the property, which may affect the ability to transfer ownership of these assets in the future. Tax liens usually are not affected by bankruptcy, and a lien will stay in place even if a person is able to discharge their tax debts. To avoid this issue, taxpayers may need to take steps to file for bankruptcy before a tax lien is put in place.

Contact Our New Braunfels Bankruptcy Lawyer for Tax Liens and Levies

If you owe taxes to the IRS along with other types of debts, it is important to take the correct steps to address this issue as you determine your options for receiving debt relief. The Law Offices of Chance M. McGhee can help you understand the benefits you may be able to receive by filing for bankruptcy, and we will advise you on the best ways to minimize what you owe and regain financial stability. Schedule a free consultation and learn about your options by contacting our Schertz bankruptcy and taxes attorney at 210-342-3400.

Sources:

https://www.thebalance.com/bankruptcy-and-tax-debts-3192950

https://www.irs.gov/businesses/small-businesses-self-employed/declaring-bankruptcy

https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien