When you accumulate a certain amount of tax debt, the IRS may file a lien against your property, including your home. These liens effectively encumber everything you own, such as your house, motor vehicle, bank account, and real estate, and everything that you acquire while the lien is still in effect. Once a tax lien is filed, it becomes public record and will eventually appear on your credit report.

IRS liens last for 10 years or until you pay the tax debt. If the government sues you, it can get a judgment that lasts longer than the 10-year limit on the lien.

Lien vs. foreclosure

Many people assume that filing a lien and foreclosing are the same thing. Although one may lead to the other, it’s not a confirmed part of the process. When the IRS files a lien against your home, it is establishing its right to possess the property until the debt is paid in full. Otherwise known as an encumbrance, it lessens the value of the home and restricts your ability to enjoy it.

Although the lien gives the IRS the legal right to seize and sell the home to pay your tax obligation, it doesn’t always do so, especially if there is not enough equity in the property to recover the debt.

If you voluntarily sell your house while the lien is in effect, the IRS will receive its money before you do. For example, if you owe $60,000 in federal tax debt and your house sells for $210,000, you will not receive your share of $150,000 before the IRS obligation is settled in full.

Is anything protected from an IRS lien? 

Like bankruptcy exemptions, certain assets are protected from seizure to satisfy an IRS debt. They include (but are not limited to):

  • Household goods that do not collectively exceed the value of $6,250
  • Tools or books for your trade or business that do not collectively exceed the value of $3,125
  • Workers’ Compensation payments
  • Unemployment benefits
  • Child support
  • Public benefits such as welfare or Social Security
  • Your home IF your tax debt does not exceed $5,000

What are your options?

You can discharge your federal income tax debt in a Chapter 7 bankruptcy under the following conditions:

  • You did not commit fraud or willfully attempt to evade paying taxes
  • You filed a tax return for the debt you now want to discharge
  • The tax debt must be at least three years old
  • The IRS must have assessed your income tax debt at least 240 days before you file for Chapter 7

Here’s the catch: federal tax liens cannot be discharged in bankruptcy, so once it is recorded, it remains in place even if Chapter 7 absolves you of the obligation to pay the debt. If you suspect that you will soon be faced with a lien, the time to file for bankruptcy is before the lien is applied. Jayson Lutzky is a Bronx, NY personal bankruptcy attorney. If you are in debt, then set up a free in-office initial consultation to learn if you may qualify for a fresh financial start. Call 718-514-6619 or visit www.MyNewYorkCityLawyer.com.