Effect of Bankruptcy Discharge on Tax Liens

Effect of Bankruptcy Discharge on Tax Liens

A tax lien remains on a debtor’s property in spite of a bankruptcy discharge of the tax debt, the same as a bank’s lien stays on a vehicle securing a discharged debt.

That said, I have seen the IRS spontaneously release a lien securing discharged debt, but I have no idea why they did it.
A tax lien does not apply to assets acquired after the bankruptcy is filed, so, if the debtor does not own real property or investments (retirement or otherwise), the remaining tax lien is not that burdensome. Car titles do not show the tax lien. It is against the law to sell any assets covered by the lien (i.e., all assets), so the client’s citizenship will prevent him from selling his vehicles. However, he can just drive them until they wear out, unless the tax authority seizes them, which is unusual.

If the debtor owns real property, he can use a chapter 13 plan that “crams down” the tax lien to its value, which is the equity in his house and vehicles and all assets. Clothes and furniture are not worth much. Cram-down works on tax liens same as vehicle liens. When the debtor finishes his chapter 13 plan, the tax lien is considered satisfied.

The IRS and Oklahoma Tax Commission used to have voluntary programs allowing a chapter 7 debtor to set up an arrangement to obtain a release of a tax lien by paying the value of his equity in all his assets in installments. In other words, a chapter 7 cram-down. If this option would be helpful to a client, I can speak with the tax authorities to determine whether these programs still exist.

Published by

Brian Huckabee

Brian Huckabee is a Tulsa, Oklahoma, attorney with a practice concentrated in bankruptcy and business law. He has handled thousands of business and consumer bankruptcy cases in the past three decades, consisting primarily of chapter 7 and 13 cases, but also including numerous chapter 11 business reorganizations and chapter 12 farm reorganizations. He represents corporate and individual debtors but also has credit union and creditor clients. He has served as an Adjunct Settlement Judge in the United States Bankruptcy Court for the Northern District of Oklahoma. He is a member (2020 chair) of the Board of Directors of the Bankruptcy and Reorganization Section of the Oklahoma Bar Association. He is licensed in all of Oklahoma’s federal judicial districts, but he concentrates in the Northern and Eastern Districts. He is a member of the Bankruptcy Section of the Tulsa County Bar Association. He received a Bachelor of Arts degree with Honors from Oklahoma State University in 1978 and a Juris Doctorate degree from University of Oklahoma in 1981. He has been married for over 30 years to a Tulsa attorney, and he has two grown children, one of whom is a Tulsa attorney. He attends Harvard Avenue Christian Church in Tulsa.