Halt an IRS Levy or Bank Account Freeze with Bankruptcy
The sudden discovery of an IRS levy or a bank account freeze can be one of the most stressful financial situations a person can face. When the Internal Revenue Service takes aggressive collection actions, it disrupts your ability to pay for basic living expenses, manage your business, and maintain financial stability.
At the Law Offices of Michael Schwartz, we understand the panic and confusion that follow these aggressive collection tactics. We have helped countless clients navigate these frightening challenges and regain control of their finances.
If you are dealing with aggressive tax collection, it is vital to understand your legal options. Bankruptcy can provide immediate, powerful relief from IRS collection actions. However, understanding the specific nuances of bankruptcy law is crucial to ensuring you choose the right path for your unique situation.
Can bankruptcy stop an IRS levy or bank account freeze?
Filing for bankruptcy may trigger an automatic stay that temporarily pauses many IRS collection actions, including certain levies, garnishments, and bank account freezes.
Understanding IRS Levies and Bank Account Freezes
Before exploring legal remedies, it is helpful to understand exactly what these collection actions entail and how they affect your financial life.
What is an IRS Levy?
An IRS levy is a legal seizure of your property to satisfy a tax debt. Unlike a tax lien, which simply secures the government’s interest in your property, a levy actually takes your property. The IRS can levy various types of assets, including physical property, wages, and financial accounts.
What is a Bank Account Freeze?
A bank account freeze is a specific type of IRS levy. When the IRS issues a notice of levy to your bank, the bank is legally required to freeze the funds in your account up to the amount of the tax debt. You will be unable to access these funds to pay your mortgage, rent, or daily expenses.
Why the IRS Takes These Actions
The IRS typically utilizes a bank account freeze or levy as a last resort. These actions occur after the agency has assessed a tax, sent you a bill (Notice and Demand for Payment), and you have neglected or refused to pay the debt. The government uses these aggressive tactics to force compliance and collect owed funds.
The Immediate Impact
The immediate impact on individuals and businesses is severe. Checks may bounce, automatic payments will fail, and daily operations can grind to a halt. The inability to access cash can quickly spiral into a broader financial crisis, making immediate legal intervention essential.
The Power of the Automatic Stay in Bankruptcy
Filing for bankruptcy provides an immediate and powerful shield against creditors, including the federal government. This protection comes in the form of an “automatic stay.”
Understanding the Automatic Stay (11 U.S.C. § 362)
The moment your bankruptcy petition is filed, an automatic stay goes into effect under 11 U.S.C. § 362. This is a federal court order that forces the IRS to stop most collection actions immediately. It acts as a legal freeze, giving you the breathing room needed to assess your situation and proceed with your bankruptcy case.
Halting IRS Collection Actions
The automatic stay is incredibly effective at halting aggressive tax collection. It immediately stops bank account freezes, wage garnishments, and asset seizures. If the IRS is in the process of levying your accounts, the bankruptcy filing forces them to stand down.
Returning Recently Levied Funds
In some instances, the automatic stay can reverse a recent freeze. If the IRS has levied your bank account, but the funds have not yet been turned over to the government, the automatic stay may force the return of those funds to your account.
Preventing New Federal Tax Liens
Filing a bankruptcy petition also stops the recording of new federal tax liens on your property. This prevents the IRS from securing a new interest in your home, vehicles, or other assets while your bankruptcy case is active.
Different Bankruptcy Chapters and Their Impact on IRS Debt
The type of bankruptcy you file will dictate how your tax debt is ultimately handled. The two most common types for individuals are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Often called “liquidation bankruptcy,” Chapter 7 bankruptcy can completely wipe out certain debts.
- Immediate Stoppage: Filing Chapter 7 immediately stops an IRS levy.
- Discharging Tax Debt: Under specific conditions, Chapter 7 can discharge (wipe out) tax debt. Generally, this applies to income taxes that are over three years old, provided the tax returns were filed at least two years before the bankruptcy, and the IRS assessed the debt at least 240 days prior to filing.
- Limitations on Discharge: Not all tax debts can be discharged in Chapter 7. Recent income taxes, payroll taxes, trust fund taxes, and any debts related to unfiled returns or tax fraud remain your responsibility.
Chapter 13 Bankruptcy
For Chapter 13 bankruptcy, this type involves a reorganization of your debts into a manageable repayment plan.
- Managing Non-Dischargeable Debt: If your tax debt cannot be discharged in a Chapter 7 case, Chapter 13 provides a viable solution.
- Structured Repayment Plan: You can include your IRS tax debt in a Chapter 13 repayment plan. This allows you to pay off the debt over a period of three to five years.
- Stopping Harassment: Chapter 13 stops IRS harassment and levies, allowing you to pay the debt through a structured, court-approved approach rather than facing sudden account freezes.
Important Limitations and Considerations
While bankruptcy is a powerful tool against an IRS levy, it is not a magic wand. There are important limitations you must understand.
- Not All Tax Debts Are Discharged: As mentioned, recent income taxes, payroll taxes, and fraudulent tax debts are typically not discharged in bankruptcy. You will still be required to pay these obligations.
- The “Stay” is Temporary: The automatic stay is not a permanent solution. Furthermore, it does not stop the IRS from conducting tax audits or requiring you to file your mandatory tax returns during the bankruptcy process.
- Existing Tax Liens Persist: While bankruptcy stops an active levy, it does not automatically remove existing tax liens from your property. The lien will remain attached to your assets until the underlying debt is resolved or the lien expires.
- Statute of Limitations Extension: The IRS generally has ten years to collect a tax debt. However, this collection statute of limitations is suspended during your bankruptcy case and for an additional six months afterward.
Why Legal Guidance is Essential
Tax law and bankruptcy law are highly complex areas of the legal system. Attempting to navigate an IRS levy without professional assistance can lead to costly mistakes and missed opportunities for relief.
A knowledgeable attorney understands the intricate rules regarding tax dischargeability and the timing of bankruptcy filings. Legal professionals can help you maximize the benefits of bankruptcy, ensure your petition is filed correctly, and help you avoid common pitfalls.
Timely action is critical when dealing with a bank account freeze, and an experienced lawyer can expedite the process to secure your assets.
Take Control of Your Financial Future Today
Bankruptcy is a highly effective legal strategy for stopping an IRS levy and releasing a bank account freeze. Through the power of the automatic stay, you can immediately halt government collection actions and find a structured path toward financial recovery. However, because of the strict rules regarding tax debts and liens, navigating this process requires careful planning.
Professional legal advice is essential to ensure you choose the correct bankruptcy chapter and fully understand which tax debts can be eliminated.
If you are facing aggressive IRS collection actions and are considering bankruptcy in Pennsylvania, do not wait until your funds are permanently seized. Contact the Law Offices of Michael Schwartz today for the help you need to protect your hard-earned assets.