A Tax Lien on a Dischargeable Tax under Chapter 7

The effect of a tax lien on a tax debt that otherwise qualifies for Chapter 7 discharge can be huge. The Chapter 7 case would usually simply discharge that debt, so you would owe nothing.
But if there’s a prior recorded tax lien, that lien survives the bankruptcy case. The discharge of the tax debt does not legally affect the lien. Then the key issue becomes the value of the assets to which the lien attaches.

If you don’t have any real estate and your other assets are minimal, the IRS/state has less leverage over you. Especially if the tax debt was not large, some tax entities will then voluntarily release the tax lien. Both the tax and the tax lien would then be gone.

But some tax entities are more aggressive. This is more likely if the amount of the dischargeable tax is relatively large. They will leverage their tax lien to require you to pay all or part of the tax debt. They won’t release their lien otherwise. Sounds unfair considering that the debt is otherwise dischargeable. But that’s the potential effect of the tax lien.

This leveraging is understandably much more likely if the assets to which their tax lien(s) attach are substantial. And in particular, this is true if that asset is equity in your home. You could be made to pay an entire tax debt that otherwise qualifies for discharge because of a tax lien.

So there’s a lot of uncomfortable ambiguity when you have tax lien on a dischargeable tax in Chapter 7.

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