Does Bankruptcy's Automatic Stay Apply to Tax Liens?

Find out if bankruptcy's automatic stay will stop the IRS or another taxing authority from imposing a tax lien on your property.

When you file for bankruptcy, the automatic stay immediately goes into effect and protects you from most collection activities. However, there are exceptions to the automatic stay. If you are concerned about a tax lien, the automatic stay may or may not protect your assets during your bankruptcy.

How the Automatic Stay Works

The automatic stay goes into effect as soon as you file a bankruptcy case. Generally, any creditors to whom you owe money at the time of the filing are affected by the stay, and they cannot take any action to collect a debt without permission from the court after notice and a hearing.

(To learn more, visit our Bankruptcy's Automatic Stay topic area.)

What Is a Tax Lien?

A tax lien is a lien placed on your property by a taxing authority (such as the state government or the IRS) for non-payment of taxes. Once the lien is in place, the taxing authority can take the property and sell it to satisfy the tax debt. If you owe property taxes, there is always a lien on the property to which the taxes apply. For other taxes, such as income taxes, the taxing authority must take extra steps to obtain a lien.

The Automatic Stay and Tax Liens

The automatic stay does not apply to tax liens if:

  • the lien is a property tax lien for taxes due after the bankruptcy filing, or
  • the lien is for taxes that you cannot discharge in the bankruptcy and the property to which the liens attach is either exempt from the bankruptcy estate or abandoned by the bankruptcy trustee and returned to the debtor
(To find out if a tax debt is dischargeable, see the articles in Tax Debts and Bankruptcy.)

Example. Lois owns a house. At the time she files bankruptcy, she owes $5,000 in property taxes for the year, although the due date for her to pay the taxes is several weeks away. The city will have a lien on Lois' house if she does not pay the taxes on time, despite the automatic stay.

Example. Janet owes the IRS $10,000 for the previous year's taxes. She cannot discharge the taxes in her bankruptcy because they are too new. Janet files bankruptcy. However, the IRS obtains a tax lien on Janet's vacation home, which the trustee intends to sell. Although the tax debt is nondischargeable, the lien is not valid, because the property is still property of the bankruptcy estate. The lien violates the automatic stay.

Example. Tony owns a car worth $5,000; he does not owe any money on it. He also owes city income taxes in the amount of $1,000, which are nondischargeable. Tony files Chapter 7 and is able to use his bankruptcy exemptions to exempt the entire value of his car, which means it is no longer property of his bankruptcy estate. The city can place a lien on the car for the unpaid taxes.

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