How Bankruptcy Handles Income Tax Levies
March 20, 2015
A tax levy is an abrupt way the taxing authorities make you to pay a tax, by taking your assets or income. Stop levies through bankruptcy.
A Levy is a Seizure
A tax “levy” may not sound much different than a tax “lien,” but they are hugely different.
The recording of a tax lien, as bad as it can be for its own reasons, is simply the IRS or state taxing authority legally making your assets into security for your payment of the tax you owe. A lien in the amount of the tax is placed on what you own, in order to put pressure on you to pay the tax. A tax lien forces you to pay the tax to clear the lien, such as when you must pay off a tax lien on your home when you sell or refinance it. A tax lien gives the IRS/state greater assurance that the tax will at some point be paid.
A tax levy is instead the IRS/state seizing something of yours now in payment of the tax.
The levy may be on something now in your possession, like your vehicle or your business assets. Or the levy may be on something of yours that is currently held by someone else, such as your upcoming paycheck, money in your checking account, commissions owed to you, life insurance cash value, or a retirement fund.
Clearly, you want to avoid being the subject of a tax levy.
Bankruptcy Stops Tax Levies
If you fear being hit with a tax levy, or are in the midst of being levied, such as on your paychecks, a bankruptcy filing will stop that levy immediately.
What stops a tax levy is the same legal power that stops virtually all collection activity against you and your assets when you file a bankruptcy case: the “automatic stay.” That’s the federal law that makes pursuing you for your debts illegal the moment your bankruptcy is filed.
Because the taxing authorities have many powers to collect debts that ordinary creditors do not have, in many respects they are not treated the same as other creditors in bankruptcy. As this current series of blog posts on taxes makes clear, the IRS and state tax agencies certainly enjoy some huge advantages over many other types of creditors. But when it comes to the power of the “automatic stay” to stop a tax levy, the IRS and state are no different than other creditors.
Tax Levies Stopped Temporarily
Sometimes it’s enough for you if a tax levy is stopped with the filing of your bankruptcy case, with you continuing to owe the tax debt after your bankruptcy is over. If you filed a Chapter 7 “straight bankruptcy” that “discharged” (legally wrote off) all or most of your other debts, it could very well leave you in a position to enter into a manageable monthly installment payment plan with the IRS or the state on the remaining tax debt. Those payment plans come with strict conditions, but if you meet those conditions you can usually be assured that you will not be subject to more tax levies.
Tax Levies Stopped Permanently
Filing bankruptcy may also put you in a position of not just stopping the tax levy for a matter of a few months, but of avoiding them forever on the tax at issue. That can happen two ways.
First, either a Chapter 7 or a Chapter 13 case may be able to discharge the debt (usually if it is old enough), so that you no longer owe it at all. Once you no longer legally owe the debt, there is nothing more for the IRS/state to levy upon.
In these situations, the “automatic stay” that comes into effect right when your bankruptcy case is filed stops the levy and prevents any new levies while the case is active. And then just before the case is completed the discharge goes into effect, eliminating the tax and preventing any further levies, or any other kind of collection, against it.
Second, if the tax that you were being levied for does not meet the conditions for being discharged (generally because that tax is not old enough), a Chapter 13 case is often a good way to pay that tax and avoid any further levy attempts. Under Chapter 13 the “automatic stay” usually lasts the entire length of the 3-to-5-year case. So throughout that time your income and assets cannot be levied upon. By the end of the case you will have paid off the tax at issue (usually under very flexible terms, and without any ongoing interest and penalties), so again there would be no tax debt left for the IRS/state to levy or collect upon.