Tax liens are legal claims to secure debts placed on personal property. They are filed by state and federal tax agencies for outstanding tax liability due. The lien is attached to the property and the rights of that property until it is removed. By law, the agency needs to notify you of an impending lien and give you a specified number of days to resolve the issue.
Why Liens are Placed
Tax liens are placed by state and federal tax agencies when you have an outstanding tax liability due. The tax agency is required to provide you with a balance and demand for payment. If this notification goes ignored, the agency must provide you with a second demand for payment. You then receive the notification of a pending lien and are given 30 days to respond. No response automatically places the lien on your property.
Effect of Liens
Liens are devastating to your property and financial situation. Since the lien attaches to your assets and any future assets acquired for the duration of the lien, you cannot sell or refinance those assets until the lien is removed. Liens are public records; they are reported to the credit agencies and may lower your credit score. Liens placed on a business attach to the business and all of its rights. Federal tax liens remain in effect even after filing and closing a bankruptcy as long as the lien is placed before you file.
Removing a Lien
Credit bureaus keep public records on your credit report regardless if the lien is paid and removed. To release the lien, you need to pay or resolve the issues surrounding your tax liability. Once the debt is satisfied, a satisfaction and lien release is sent to the state or county recorder and reported to the credit bureaus. If a tax lien is filed in error, a lien release is created and the lien holder needs to contact the credit bureaus to report the error and have it removed from his credit report.
Lien versus Levy
A tax lien is not the same as a tax levy. A lien secures payment for a debt against your property, while a levy seizes the property. If you still do not make arrangements to pay your tax debt after a lien is placed, you could face a tax levy on any real or personal property you own, such as your home, car or business.
Avoiding a Lien
You can avoid state and federal tax liens by filing your returns and paying your liability on time. If you are unable to pay your tax liability, communicate with the tax agency and make payments. Ignoring it only informs the tax agency of your refusal to pay, which forces the agency to file a lien against your property.
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