Debtor’s often have Notice of Federal Tax Lien outstanding at the time they file bankruptcy. How are these handled? Broadly, a properly-noticed lien survives bankruptcy. It continues to attach to any property owned at the time of the bankruptcy. But the lien does not attach to any property acquired after the petition date. Let’s look at liens on two kinds of property.

Lien on Real Property

If the bankrupt debtor owns a house and the IRS has filed a Notice of Federal Tax Lien against the debtor’s real property (in the county records), then the IRS will generally keep that notice in place after bankruptcy. The house may be underwater and the IRS lien thus worthless, but if the house appreciates in value, the IRS is entitled to the new value. If, however, the debtor acquires a new piece of land after filing bankruptcy and discharging his taxes, the IRS lien won’t attach to the new piece of land.

Lien on Personal Property

If there is a Notice of Federal Tax Lien filed against personal property, then it attaches to everything the debtor owns on the day of the bankruptcy petition. Once the debtor discharges the underlying tax, the IRS still has the right to seize all your personal assets (even those exempted) to satisfy its lien, but it just won’t. Imagine: you, as a debtor, file for bankruptcy, go through the entire process, get your debts including your tax debts discharged, and then they send the Asset Recovery Team to your house to seize your car and sofas – for which it could get how much at auction? Also, the lien doesn’t attach to newly-acquired property, so the IRS would need to investigate whether the bracelet it proposes to seize and sell came from Aunt Tammy as a birthday gift after the bankruptcy petition was filed. The IRS long ago figured out that the public relations and legal problems here are huge, so they’ll go ahead and release the lien.

Avoiding the Lien

Bankruptcy lawyers love to avoid judicial liens that impair exemptions. If a creditor has a judgment, the creditor can file an abstract of judgment that then attaches to the debtor’s house, and would remain after the discharge is issued. But if the debtor has only $50,000 of equity in the house, and uses an applicable exemption on the house, then the debtor can move to avoid the lien under 11 USC § 522(f). This doesn’t work against a tax lien: the section refers to judicial liens, that is, liens coming from a lawsuit; the tax lien is a statutory lien that cannot be avoided.


January 11, 2022

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