How Does Filing for Bankruptcy Affect Liens and Levies?

For those struggling with overwhelming tax debt, filing for bankruptcy may be able to provide relief but it does not automatically erase all IRS obligations. While bankruptcy can halt collection actions like levies and garnishments, IRS tax liens may still remain in place. Understanding how bankruptcy affects tax debt can help you determine the best course of action.

The Automatic Stay stops IRS collection actions

One of the immediate benefits of filing for bankruptcy is the automatic stay, which puts a temporary stop to most IRS collection actions. This means that the IRS must cease the following:

• Wage garnishments – If the IRS is currently deducting money from your paycheck, the garnishment must stop.
• Bank levies – Any seizure of funds from your bank account is halted.
• Property seizures – The IRS cannot take further action to seize assets.
• New collection notices – The agency is restricted from issuing additional collection demands.

However, while the automatic stay offers immediate relief, it does not eliminate pre-existing tax liens.

How bankruptcy affects tax liens

An IRS tax lien is a legal claim against your property due to unpaid taxes. If the IRS has already placed a lien on your property before you file for bankruptcy, the lien will not automatically go away—even if the underlying tax debt is discharged.

• Chapter 7 Bankruptcy.
  While Chapter 7 can eliminate eligible tax debt, it does not remove a tax lien that was already recorded. If you own property with an IRS lien, the IRS can still claim the proceeds when you sell the property.
• Chapter 13 Bankruptcy.
  Under Chapter 13, tax liens can be included in a structured repayment plan, allowing you to pay off the debt over time. In some cases, this can reduce the overall amount owed.

How bankruptcy affects IRS levies

An IRS levy is the actual seizure of wages, bank accounts, or property to satisfy a tax debt. Bankruptcy has a stronger impact on levies than on liens:

• Ongoing levies must be lifted – Once bankruptcy is filed, any active wage garnishments or bank levies must stop immediately.
• Levies cannot be reissued for discharged debts – If the bankruptcy court eliminates your tax debt, the IRS cannot reinstate levies for that specific debt.

Can bankruptcy discharge IRS tax debt?

Not all tax debts are dischargeable in bankruptcy. To qualify for discharge, tax debts must meet specific criteria:

• The tax return for the debt must have been due at least three years ago.
• The tax return must have been filed at least two years before bankruptcy.
• The IRS must have assessed the debt at least 240 days before filing.
• There must be no fraud or tax evasion involved.

If these conditions are met, Chapter 7 bankruptcy can eliminate qualifying tax debt, while Chapter 13 allows you to repay it under a court-approved plan.

Final Thoughts on Bankruptcy for Tax Relief

Filing for bankruptcy can provide immediate relief by halting IRS collection efforts such as wage garnishments and bank levies. However, while bankruptcy may discharge certain tax debts, it does not automatically eliminate all IRS obligations. One key distinction is that tax liens remain in place even if the underlying debt is discharged, meaning the IRS can still claim the value of a property if it was subject to a lien before bankruptcy.

Although some tax debts can be wiped out through bankruptcy, they must meet strict eligibility criteria, including requirements related to the timing of tax filings and assessments.

Additionally, the type of bankruptcy filed plays a crucial role in how tax debts and liens are handled. Chapter 7 bankruptcy can discharge certain tax debts but does not remove existing liens, while Chapter 13 bankruptcy allows taxpayers to restructure their debts into a repayment plan, potentially addressing tax liens over time.

Understanding the impact of bankruptcy on IRS debts is essential before making a decision. Consulting with a tax attorney or bankruptcy professional can help you determine the best path forward based on your specific situation.