Can Chapter 7 Wipe Out IRS Lien on Homestead?

I received an e-mail from someone who had filed Chapter 7 bankruptcy after the IRS had placed a tax lien on his homestead. The person stated that the taxes due were discharged in the bankruptcy. The general rule is that income taxes due three years prior to filing Chapter 7 are dischargeable. After the bankruptcy was over the writer tried to sell his house and found that the IRS lien still encumbered the house and had to be paid from sale proceeds. He wants to know why his house was subject to an IRS lien if his income taxes were wiped out in the bankruptcy.

This situation is not uncommon. The IRS lien does still attach. When the IRS issues a tax lien that lien changes the income tax obligation to a secured debt. When he filed bankruptcy the IRS had already obtained a security interest in his homestead. Homestead property is not protected from IRS liens. Even if the income taxes were otherwise dischargeable, the IRS tax lien, just like other pre-petitions mortgages and security interest, cannot be wiped out in a bankruptcy. If the IRS gets a tax lien on your property before you file bankruptcy, the bankruptcy will not wipe out the tax lien.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida.