Does a Discharge Eliminate a Tax Lien on a Home?

Question from JT, Does a Discharge Eliminate a Tax Lien on a Home?

Answer from AI:

When a debtor receives a discharge in bankruptcy, it can eliminate their personal liability for certain debts, including state income taxes under specific conditions. However, whether a tax lien on the debtor’s home is reduced to $0.00 is a more complex issue.

Understanding Bankruptcy Discharge and Tax Liens

A bankruptcy discharge releases the debtor from personal liability for specific debts, meaning they are no longer legally required to pay those debts. However, a discharge does not automatically eliminate liens that were placed on the debtor’s property before the bankruptcy filing.

Types of Bankruptcy

There are different types of bankruptcy filings, each with its own rules and implications for tax liens:

• Chapter 7 Bankruptcy: This type of bankruptcy can discharge personal liability for certain debts, but it does not automatically remove liens. The lien remains attached to the property unless specific actions are taken to remove it.
• Chapter 13 Bankruptcy: This involves a repayment plan, and under certain conditions, it may be possible to strip off or reduce liens, but this is subject to court approval and specific legal criteria.

Conditions for Discharging State Income Taxes

For California state income taxes to be discharged in bankruptcy, several conditions must be met:

1. The tax return was due at least three years before the bankruptcy filing.
2. The tax return was filed at least two years before the bankruptcy filing.
3. The tax assessment is at least 240 days old.
4. There was no fraud or willful evasion involved.

Impact on Tax Liens

Even if the state income taxes are discharged, the lien itself may not be automatically removed. A lien is a legal claim against property to secure payment of a debt. If the lien was recorded before the bankruptcy filing, it generally survives the bankruptcy discharge.

Steps to Address a Tax Lien

To potentially remove or reduce a tax lien, the debtor may need to take additional steps:

1. Motion to Avoid Lien: In some cases, the debtor can file a motion to avoid the lien if it impairs an exemption to which the debtor is entitled.
2. Negotiation with Tax Authorities: The debtor may negotiate with the California Franchise Tax Board (FTB) to release or reduce the lien.
3. Legal Action: Consulting with a bankruptcy attorney to explore legal actions that may be taken to address the lien.

Consulting a Legal Professional

Given the complexity of bankruptcy law and tax liens, it is crucial to consult with a legal professional who specializes in bankruptcy. They can provide personalized advice based on the specific circumstances of the case.

Resources for Further Information

For more detailed information, you can refer to the following resources:

• U.S. Courts – Bankruptcy Basics
• California Franchise Tax Board – Bankruptcy Information

Remember, while this information provides a general overview, it is not a substitute for professional legal advice. Always consult with a qualified attorney to address your specific legal needs.