The Short Answer
A tax lien is a legal security interest the IRS or NC Department of Revenue places against all of your property — real estate, vehicles, bank accounts — when you owe unpaid taxes. A tax levy goes a step further: it's the actual seizure of your property or wages to satisfy that debt. If you're facing either, bankruptcy may help. Filing bankruptcy triggers the automatic stay, which halts most collection activity, and in some cases can eliminate older tax debts or let you restructure what you owe over three to five years in a Chapter 13 plan.
With limited exceptions, most Americans are required to file tax returns with the Internal Revenue Service, and if you work or live in North Carolina, the North Carolina Department of Revenue. If you do not file and pay your taxes on time each year, you will incur penalties and interest on the amount of money you owe the tax entity. Initially, the tax entity will likely work with you to establish a payment plan for the taxes you owe. However, if you make no effort to contact and work with the taxing entity, do not be surprised if a lien is placed against all of the property you own or your wages are garnished through a tax levy.
First, let’s discuss the difference between a tax lien and a tax levy.
A tax lien is a security interest against your property. The IRS records a tax lien with the clerk of court in the county where you live. The lien is on all real and personal property you own including your house, car, bank accounts, clothing, household goods, etc. As a result, you will be unable to sell your home, car or other possessions without first obtaining a release from the IRS. In other words, the IRS will now allow you to sell your house and make a profit without being paid at least a portion of the debt that is owed to them.
A tax levy is a legal seizure of your property to satisfy a tax debt. With a tax levy, the IRS can seize and sell your house, car or other assets. They can also seize your bank accounts, retirement accounts, state tax refunds and other assets. They can also garnish wages.
By filing bankruptcy, you may be able to eliminate some of the tax debt and stop a wage garnishment while in an active bankruptcy. If you file a Chapter 7 bankruptcy to eliminate credit card, medical bill and other consumer debt, the wage garnishment will stop while you are in the bankruptcy but may resume once the bankruptcy is complete and if taxes are still owed. In certain situations, amounts owed on taxes that were due more than three year ago may be eliminated in a Chapter 7 bankruptcy. Unfortunately, if a tax lien is placed for the older tax years the tax debt may be eliminated BUT the lien is still in effect. As a result, you may still be required to pay the taxes if you sell your house or car in the future. As a result, you should contact the IRS and State of North Carolina and request a copy of any tax liens prior to filing bankruptcy.
You may want to consider a Chapter 13 bankruptcy to restructure your tax debt and pay the taxes over the course of three to five years. If you decide to file bankruptcy to restructure your tax debt, it is very important you determine whether there is a tax lien before the bankruptcy is filed. The existence of liens will impact the amount owed in the bankruptcy and will directly impact the monthly payments in a Chapter 13 repayment plan.
Tax liens and tax levies are the IRS’ and State’s way of ensuring taxes are paid by the majority of their citizens. If taxes are owed, it is best to work with the IRS and state proactively to avoid tax liens and levies. However, should you find yourself with a lien or levy, you may want to consider bankruptcy to restructure the payments.
Key Takeaways
- A tax lien attaches to all property you own and must be paid or released before you can sell your home, car, or other assets.
- A tax levy is the IRS or state actually seizing your property or garnishing your wages — it is more aggressive than a lien.
- Filing bankruptcy triggers the automatic stay, which immediately halts most IRS and state collection actions including wage garnishment.
- Tax debts more than three years old may be dischargeable in a Chapter 7 bankruptcy, but any existing tax lien can survive the discharge and still encumber your property.
- Chapter 13 allows you to repay non-dischargeable tax debt over 36 to 60 months, which is often more manageable than IRS installment agreements.
- Always pull a transcript of filed tax liens from the IRS and NC Department of Revenue before filing bankruptcy — existing liens directly affect your Chapter 13 plan payment amount.
Attorney Insight
The mistake I see most often is someone filing a Chapter 7 thinking they've wiped out an old tax debt — and they have, as a personal obligation — but they're blindsided months later when they try to sell their house and the IRS lien is still sitting on the title. A discharge eliminates your personal liability for eligible tax debt, but it does not automatically extinguish a lien that was already recorded with the county clerk. In North Carolina, I always advise clients to request an IRS transcript and a lien search from the NC Department of Revenue before we file anything, because that lien balance has to be accounted for in a Chapter 13 plan or negotiated separately post-discharge.
