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How Can IRS Tax Liens and Judgment Liens Be Eliminated?

Robert J. Adams & Associates July 22, 2020

IRS Liens

The IRS often files tax liens on property. The lien is extended to all property in the county in which it is filed. The tax lien applies your house and all your personal property. The lien is good for 10 years.

There are 2 instances where the tax lien can be avoided in entirely or partially.

The first instance is where the value of the real estate is less than the payoff balances of the mortgages.

An example is that the market value of the house is $200,000 and the 1st mortgage balance is $175,000 and the 2nd mortgage balance is $30,000. The IRS lien can be avoided in its entirety.

What if the value is $210,000 while the mortgage balances are only $205,000? Then $5,000 on the IRS tax lien has to be paid 100% in a Chapter 13 and the balance is an unsecured debt.

Unlike Judgment liens discussed later individuals cannot assert the homestead exemption against the IRS.

Unlike eliminating 2nd mortgages the order of court eliminating the IRS lien can be filed immediately.

There are 2 problems that can occur.

First the debt attached to the lien might be a claim that is not dischargeable. This might apply if the tax lien was for a recent tax year or if the tax liability was for payroll taxes.

The second is that the lien applies to personal property. In my view used furniture has almost no value. That being said the amount that has to be repaid would only be few hundred dollars.

Judgment Liens

A judgment lien is a type of nonconsensual lien (a lien that attaches to your property without your agreement). It is created when someone wins a lawsuit against you and then records the judgment against your property.

A judgment lien is obtained by creditors after they file a law suit and obtain a judgment. The creditor records the judgment with the Recorder of Deeds.

Judgment liens can be avoided (reduced to unsecured debts) to extent that it impairs the Debtor’s judgment. The avoidance is allowed in both Chapter 7 and Chapter 13.

Illinois allows a series of exemption to individual who file a bankruptcy. As to homes the exemption is $15,000 for one person and $30,000 for a married couple.

If the balance of mortgages and possible prior liens plus the exemption exceeds the market value of the house the judgment lien can be avoided in its entirety.

An example might be as follows for a married couple the mortgage balances are $100,000 plus $30,000 homestead exemption while the market value of the house is $125,000. In this instance the judgment lien can be avoided in its entirety.

What if there is some small equity after applying the exemption. Assume a judgment lien in the amount of $10,000. The mortgage balance is $100,000 and the married couple’s exemption is $30,000 but the market value is $134,000. Then the judgment lien is avoided partially: the Chapter 13 must pay $4,000 in full and the balance as an unsecured debt.

The treatment in a Chapter 13 is to pay the market value plus interest over a period up to 5 years; the excess balance is paid as a general unsecured debt at a very low dividend

For more information on Eliminating IRS Tax & judgment Liens, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling today.