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IRS Liens, Bankruptcy Discharge, and Other Misconceptions

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It is somewhat surprising how many misconceptions about the IRS, tax payment demands, tax liens, bankruptcy and discharge of such demands and liens exist in this modern world of whirling overwhelming information glut.  One misconception is that the IRS is just like any other creditor in a Chapter 7 bankruptcy filing, to be wiped out by the trustee at bankruptcy discharge.  Not so, fair debtor, not so.  In fact, an IRS tax demand is one of the most difficult, though not impossible, liabilities to “wipe out” by discharge.  By federal law, and this cannot be overruled by state law, IRS tax demands are excluded from discharge.  Another misconception, oddly enough, is that there is no way in a bankruptcy to rid one’s self of an IRS tax demand.  What can happen is that a debtor can file a motion of extraordinary hardship due to the financial situation that the debtor will have even after Chapter 7 discharge.  What this motion allows the debtor to do is tell his or her story of how debilitating the IRS tax demand will be to the debtor’s ability to recover after discharge.  The trustee and the bankruptcy court judge will likely have a hearing to interview the debtor, and other appropriate people, all of them under oath, to determine if the motion and debtor situation has merit.  If the trustee and judge decide in favor of the debtor, the IRS tax demand can be reduced, but typically the tax demand is completely wiped out.

A third misconception is that an IRS tax lien placed on a debtor’s asset is meaningless in a Chapter 7 bankruptcy.  The debtor typically expects that the asset with the IRS tax lien is available for liquidation, which is untrue, or that if the asset is exclude or unable to show sufficient worth to be liquidated, that the IRS tax lien goes away for some mysterious reason.  This is also untrue.  An asset that carries an IRS tax lien is typically excluded from the assets the trustee might seize.  If the asset is excluded, the asset does continue to carry the IRS tax lien, even if the IRS tax demand is wiped out due to a hardship motion.  The IRS must process the results of the bankruptcy and determine if its demand value is at zero, which it is if fully paid off or if wiped out by hardship.  The IRS will then process a lien retraction to the credit bureaus.  This is said to often occur four to six months after the discharge is finally processed.  The former debtor must be self-diligent and ritualistically review all three major credit reports to determine that the IRS lien is removed.  This will cause a positive change in credit score.  Experts state that if after six months the lien is still active, the debtor must petition the IRS to have the lien removed or show in writing the cause for its continued existence.  This gets the IRS’s attention and the lien is typically removed within two months.  The recommendation is to continue diligence on a monthly basis and inquire where the lien reversal is and why is has not been processed.


This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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