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Can Bankruptcy Eliminate Tax Liens or Civil Judgments?

Typically, many negative financial events precipitate the decision to file for bankruptcy. Some people come to the decision to file for bankruptcy only after suffering tax liens placed against their property or civil judgments issued by a court. The implications of these legal measures to collect debt is scary and overwhelming for most people, and many wonder if there is any way to avoid the dire consequences that often follow the enforcement liens and judgments. Facing these issues when they are legitimate is hard enough, but when the existence of liens and judgments are inaccurately included on credit reports, a situation potentially affecting millions of Americans, the fallout is even harder to control.

Per a recent settlement reached with Experian, the credit reporting agency, which inaccurately reported tax liens and civil judgments on a large number of credit reports, will have to provide credit monitoring, and perhaps payment, to affected consumers. The ramifications of tax liens and civil judgments is substantial, and a discussion of how Chapter 7 bankruptcy may impact the need to pay these debts, once a discharge is issued, will follow below.

Tax Liens

Owing taxes to the government is never a pleasant experience, and if the tax bill is high, the pressure to find the money to pay it never relents. The government, both state and federal, have many avenues to compel compliance, and the tax lien is the standard procedure used to grant the government access to a taxpayer’s personal and real property. State and federal law can differ on the details, but the basic process involves tax officials issuing a notice to the local county clerk to establish the lien. Whether Chapter 7 bankruptcy can affect the existence of the debt will depend on a few factors. First, when was the lien filed? Once a bankruptcy is initiated, an automatic stay goes into effect, and blocks all creditors, including the IRS and State tax agencies, from taking legal action until the case is discharged. Thus, at least during the pendency of the bankruptcy, the government can not place a new tax lien on property. If, however, the tax lien was already in place, bankruptcy can only discharge this type of a debt in few situations, including:

  • The lien was not recorded;
  • The lien was recorded in the wrong county; or
  • The lien is more than 10 years old.

Outside of these limited circumstances, tax liens will not disappear with bankruptcy, and the debtor will need to pay the overdue taxes in full, or work out a payment plan with the tax authority to avoid seizure and sale of property.

Civil Judgments

Civil judgments, which typically follow lawsuits by unpaid creditors, are thankfully much more easily dischargeable in bankruptcy, meaning the judgment can no longer be collected upon. To fully answer whether discharge is applicable, the type of debt outstanding and whether a lien is already in place must be assessed. While most judgments can be eliminated, a few can not be erased through bankruptcy, principally those related to child support/alimony, taxes, student loans, and personal injury judgments. However, even if a bankruptcy relieves a person of the obligation to pay the debt, the lien is still attached, and a debtor will need to separately seek to remove it, which is generally limited to judgments issued without the debtor’s consent and placed on property the debtor was allowed to exempt under bankruptcy rules. This analysis is extremely complex, and a bankruptcy attorney should be consulted to see how the law applies.

Contact an Indiana Bankruptcy Attorney

Bankruptcy may be able to offer the help you need to financially recover, but every situation is unique, as is the relief bankruptcy may provide. Christopher L. Arrington, P.C. understands the stress and worry you experience daily, and is here to help you find a way out. Contact the Danville law firm today to schedule an appointment.

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