Federal Tax Liens in Chapter 13

I recently filed a Chapter 13 case and had an issue arise which I see occasionally that I thought might be of interest to the consumer debtor bar. In my case, the debtor lived in Travis County and owed the IRS taxes for several years, all but one of which would be dischargeable as “stale” taxes. The IRS filed a tax lien, but filed it in Williamson County, not Travis.

The improper filing creates a tax lien against the debtor, but not as against third parties, i.e., a judgment lien creditor, like a trustee in bankruptcy which has the status of a hypothetical judgment lien creditor under Section 544(a)(1) or a bone fide purchaser of real property under 544(a)(3).

This made a huge difference in my case because the debtors had significant equity in their home but did not have sufficient disposable income to pay the IRS claim. If the lien was “good”, they would have had to sell their home to pay the lien. Since the lien was unperfected as against the trustee, the claim became unsecured and they were able to pay significantly less than the amount of the claim. (And the IRS did the right thing and amended their claim so I didn’t have to file an adversary to determine the validity and priority of the lien.)

For a discussion of this issue, see the Internal Revenue Manual, Part 5, Chapter 17, Section 2, which can be found at www.irs.gov/irm/part5/ Scroll down to 5.17.2 titled Federal Tax Liens and get the Service’s take.

The practice tip here is if you get a secured proof of claim from the IRS, don’t assume it is perfected. Check. Most counties have their real property records online now, so it is no great burden. I am not suggesting that this is a common situation, but this is not the first time I have seen it.

Michael Baumer


Law Office of Michael Baumer

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by Michael Baumer