It's reader question time again!
This time I have a question from a taxpayer who had his IRS Tax Debt discharged through bankruptcy.
Bankruptcy didn't end his Tax Debt woes, however.
Here is "Bill's" IRS Bankruptcy question:
"I filed for chapter 7 bankruptcy this past May and was discharged of my debt. However--IRS has liens on my home which survive the BK. I want to remove them somehow to refi.
But the liens are heavy and I don't have the ancillary cash right now to work out a settlement---they are strapping me right now. I need to get the equity out of my house to pay for newer income taxes---seems like a never ending battle."
Here was my response for Bill:
Bill,
I have to tell it to you straight- it appears that the equity in your residence was exempted through the bankruptcy. The IRS can collect on the exempted property even if the taxes were discharged in the bankruptcy. Here is the applicable section of the bankruptcy code:
Section 522, Exemptions. Provided in this section of the code are property exemptions a debtor may select. The federal exemptions apply unless the state in which the debtor is domiciled has enacted specific legislation authorizing or mandating the use of state exempted property limitations.
1. Under 11 USC § 362, collection may not be pursued against property exempt under § 522 while the automatic stay is in effect.
2. Upon discharge exempt property is subject to collection of dischargeable taxes and non-dischargeable taxes for which a Notice of Federal Tax Lien (NFTL) was filed prior to the petition date.
This means that the IRS can foreclose on the Federal Tax Lien that attaches to the property. The IRS will not remove the lien from the home and pursuing that issue may actually start collection action against the house.
Since the physical lien is a self releasing document, IRS may not take any actions prior to the expiration date of the lien and the lien may self release. That date is listed on the face of the lien in column "e".
The Lesson: I've said it before, but Bankrutpcy is not the best way to resolve your Tax Debt issue. People think it just removes their debt from existence, but like in this case, there's usually something extra you have to work with.
Liens linger. Penalties continue to accrue. It's a mess. You're better off finding a way to repay your tax debt in full than to attempt to discharge it through bankruptcy.