Bankruptcy and Tax Liens

Bankruptcy and Tax Liens: What You Need to Know

If you’re struggling with tax debt and wondering whether bankruptcy can help, you’re not alone. We get questions all the time at our firm about bankruptcy and tax liens. The law is so complex that understandably, they have no idea how tax debt might affect their case.

Many people assume taxes can never be discharged in bankruptcy, but that’s not entirely true. While tax debt is more complicated than credit card or medical debt, bankruptcy can still provide relief.

As a Memphis bankruptcy lawyer, I’ve helped hundreds of people navigate tax-related debt through bankruptcy. Let’s break down what you need to know about how bankruptcy affects tax liens and IRS debt.

Can Bankruptcy Discharge Tax Debt?

The short answer? Sometimes. Bankruptcy can eliminate certain income tax debts, but only if they meet specific criteria:

First, the taxes need to be income taxes. Bankruptcy won’t erase payroll taxes, fraud penalties, or trust fund taxes.

Timing also matters. For example, the tax debt has to be at least three years old. And your tax return has to have been due at least three years before filing for bankruptcy.

In addition, you have to have filed your tax return at least two years ago. If you never filed a return, the tax debt likely won’t be discharged. But if you have questions about your tax filing history and how it might impact you, we can help.

And last but not least, if the IRS believes you intentionally avoided paying taxes, those debts won’t be discharged in bankruptcy.

If your tax debt meets these requirements, you may be able to eliminate it through Chapter 7 bankruptcy, which wipes out eligible debts. Depending on the situation, you might also need or prefer Chapter 13 bankruptcy, which restructures your debt into manageable payments over time.

What About Tax Liens?

A tax lien is different from regular tax debt. If you owe the IRS money, they can place a lien on your property. This means they have a legal claim to it until the debt is paid.

Unfortunately, bankruptcy doesn’t automatically remove existing tax liens—even if the underlying tax debt is discharged.

Here’s how it works:

• If the IRS hasn’t placed a lien on your property yet, filing for bankruptcy could discharge the tax debt. This would prevent the IRS from filing a lien in the future.
• Or, if a tax lien already exists, bankruptcy can wipe out your personal obligation to pay, but the lien itself will remain. That means the IRS can still seize assets covered by the lien unless you negotiate a release or pay it off.

What Are Your Options?

If you’re facing a tax lien and overwhelming debt, you still have options:

1. File for Chapter 7 Bankruptcy

This option can discharge qualifying tax debt and prevent future IRS collection efforts. However, existing liens may stay on your record.

2. File for Chapter 13 Bankruptcy

If you have tax liens, Chapter 13 allows you to repay your tax debt over time through a structured repayment plan. In some cases, this can result in a partial or full release of the lien.

3. Negotiate with the IRS

Sometimes, you can work out a payment plan or an Offer in Compromise with the IRS to settle your tax debt for less than what you owe.

If you want to learn more about these options and which one might be right for your specific situation, we offer a free consultation. You can meet with one of our award-winning attorneys to talk through your questions and concerns at no charge, no strings attached.

Should You File Bankruptcy for Tax Debt?

If tax debt is one of many financial burdens you’re facing, bankruptcy might be the right solution. But every case is different, and the best way to know your options is to speak with an experienced bankruptcy lawyer who can assess your situation and guide you in the right direction.

If tax debt or a tax lien is making life stressful, don’t wait to take action.

As a Memphis bankruptcy attorney, I’ve helped people just like you find relief and regain control of their finances. We look at all of your debt and the risks you’re facing and we talk through your goals and where you want to be at the end of the process. And then we make it our job to help you get there.

Don’t let tax debt hold you back any longer or cause you any more stress. Contact us today for a free consultation, and let’s find the best path forward for your situation.