How To Handle A Surviving Tax Lien After Chapter 7 Discharge

Old taxes may be discharged in Chapter 7 bankruptcy, subject to several conditions. Sometimes my bankruptcy clients contact me after they received their discharge and complain that there is still a tax lien on the title to their home even though they understood that the bankruptcy would discharge their IRS debt. Why is there still a tax lien if their taxes were discharged.

Discharging underlying tax debt does not strip IRS tax liens which were perfected prior to the bankruptcy petition filing. This does not mean the IRS will take the debtor’s home. I read an interesting analysis on a Consumer Bankruptcy Attorney discussion group where bankruptcy attorneys shared their experiences dealing with tax liens after discharge of underlying tax debt. The attorneys’ comments are consistent with my own experiences.

The IRS does not like to kick people out of their homes. For that reason, I have never seen the IRS use a tax lien to foreclose on someone’s homestead, although I’m sure it happens in extreme cases. My experience is that after bankruptcy which discharges underlying tax liability the taxpayer may negotiate with the IRS to release the tax lien, and the IRS is reasonably liberal in this regard. Many homes are upside down after the real estate recession; the IRS usually will voluntarily release tax liens on homes with no current equity. The taxpayer may sell the home without the lien if it appreciates in the future.

The IRS will discount the value of homes with equity to a realistic amount that they would realize from a quick, distress sale. Then, the IRS will account for mortgages that a superior to the tax lien. From the net amount of value, the taxpayer should be in a good position to further negotiate a reduction in amounts due in order to free the homestead of the tax lien.

Remember also that tax liens have a limited life span. A tax lien dies a natural death 10 years after the assessment of the underlying tax debt.