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Reducing Or Stripping Off State Or Federal Tax Liens In Chapter 13 Bankruptcy Cases

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Under 11 USC 506, the value of a state tax lien can be determined by subtracting the amount of any prior liens from the value of the property. The remaining amount is the value of the state tax lien. This is known as the "lien stripping" process.

In Chapter 13 bankruptcy cases, debtors can propose a repayment plan that allows them to reorganize their debts and pay them off over a period of three to five years. If the value of the state tax lien is less than the amount owed, the debtor can treat the lien as a secured claim and pay the value of the lien through the Chapter 13 repayment plan. Any remaining amount owed on the lien may be treated as an unsecured claim and paid off along with other unsecured debts. The option is not available in Ch 7 cases.

However, if the value of the state tax lien exceeds the value of the property, the debtor may be able to strip off the lien entirely and treat it as an unsecured claim. This is only possible in certain circumstances, such as if the lien is entirely unsecured or if the value of the property is less than the amount of the prior liens.

It's important to note that the process of valuing state tax liens in Chapter 13 bankruptcy cases can be complex and may require the assistance of a qualified bankruptcy attorney. The process in most cases requires a separate civil lawsuit filed against the tax agency called an "Adversary Proceeding." This is a process that requests that the Bankruptcy Court determine or decide the total value of the Debtor(s)" property subject to the tax lien.

Once the Court determines the value, it is empowered under 11 USC 506 to "strip off" the portion of the tax lien that does not attach to the property. ( A simple example would be a Debtor who lists $10,000 in total property on Schedules A and B, with a state tax lien of $20,000.00. If successful, the Court can strip off $10,000.00 of the tax lien and recharacterize its legal status as general unsecured debts. In many ch 13 cases the Debtor can pay general unsecured creditors less than what is owed, at 0% interest in the Plan, and sometimes $0.00, depending on the Debtor's household income and other assets on the date of the bankruptcy case filing.