Tax liens are serious. But fortunately, they at least don’t go on your credit report anymore.
Experian, Equifax, and TransUnion made the decision to exclude new tax liens from credit reports in 2018 and gave consumers the option to have their existing tax liens removed. Previously, a tax lien on your credit could bring your score down substantially and make borrowing even more difficult.
Today I’ll cover what exactly a lien is, plus some other ways you can help your credit score.
What’s Ahead:
What’s a lien?
A tax lien is placed on your (or your business’s) property when you fail to pay personal or business taxes. This property can include cars, your home, your assets, or your business.
When you owe a tax debt to the IRS, they have a legal right to your property. You will receive a Notice of Federal Tax Lien, which is public record.
How a lien can affect your credit
In the past, tax liens appeared on credit reports and showed potential lenders that you were a bigger risk than people without them. This changed in 2018.
It’s difficult to determine exactly how much a tax lien could affect your score, but it was considered a severe mark against you. According to John Ulzheimer, a credit expert who has worked for FICO and Equifax, “A tax lien is considered a severe derogatory entry, just like bankruptcies, judgments, collections, charge-offs and repossessions.”
Now you can see why the removal of these liens was such an important move.
After this change was made in 2018 by the major credit bureaus, some consumers saw an immediate positive effect on their credit, depending on what their score was and what caused it. The Consumer Financial Protection Bureau (CFPB) found when liens were removed from reports, the following changes occurred:
- 75% remained in the same credit score band
- 17% moved to a higher credit score band
- 6% moved to a credit score band of prime or above
- 66% stayed subprime or deep subprime
Why the change?
You’re probably wondering why the change went into effect at all. Well, the Consumer Financial Protection Bureau ran a study and found significant problems with credit reporting.
There’s a history of inaccuracy when it comes to credit reports, a main source of consumer complaints. And the study found that civil judgment records such as tax liens were especially prone to errors in reporting such as incorrect consumers being linked to liens, incorrect locations, and more.
As a result, Experian, TransUnion, and Equifax moved to exclude tax liens entirely.
But mistakes still happen. It’s important to constantly monitor your credit to check for errors.
How to get rid of a lien
Even though tax liens don’t show up in your credit, they’re still a big deal. If you find yourself with one, you want to do everything you can to get it released so you can keep your property. Here are some ways to get it removed.
Pay off your debt
As with any debt, the easiest way to get a negative mark off your report is to pay off your debt. If you can’t pay your taxes on time, set up a payment plan with the IRS—that will ensure that you’re making timely payments and a tax lien won’t appear on your report.
Apply for a withdrawal
A withdrawal will remove the public notice of the lien, but you’re still liable for any unpaid tax debt. To apply for one, you’ll need to fill out IRS Form 12277.
You may be eligible for withdrawal if you’ve kept up with filing all tax returns on time for the past three years and you’re current on other tax payments.
You may also qualify if you owe $25,000 or less and you’ve set up a direct debit installment agreement where you’ll pay back the debt within 60 months or before the collection statute expires (whichever is earlier).
Subordination
A subordination doesn’t get rid of the lien but it allows creditors to move ahead of the IRS, which can make getting a loan or mortgage easier for you. Basically, it means that the IRS no longer has first claim to your property and allows another debtor to take priority.
But if you can’t pay taxes, you should avoid taking out large loans or trying to purchase property if at all possible.
Read the IRS’s instructions for applying for a subordination.
Discharge of property
A discharge of property removes the lien from a specific asset or property (your house, car, etc.). However, the rest of your property and assets remain subject to the lien. A discharge assesses which pieces of property are eligible to be claimed.
Applying for a discharge of property typically allows you to sell the discharged property in order to receive the funds to pay off the IRS for the rest of it.
Here’s the IRS’s instructions for applying for a discharge of property.
How to pay off debt
If you have a tax lien and are struggling to get out the debt, and you don’t qualify for any of the forms of partial relief above, it might be time to evaluate your finances and look for opportunities to trim expenses.
But we understand that this is easier said than done. Another option is to focus on one debt at a time. Most likely, you’ll want to shift your priorites in order to get the tax lien taken care of. This may mean making smaller payments on your credit card debt or other debt. You may also need to work with your lenders to defer payments or negotiate your bills down for a few months until you can get back to paying them.
It goes without saying that the sooner you get rid of a tax lien, the better. Even though these don’t affect your credit, they can still negatively impact nearly every aspect of your finances.
Read more: How to get out of debt on a low income
Summary
If you have a tax lien, it won’t land on your credit report.
However, this doesn’t mean you are off the hook. You’ll still need to pay your taxes—and all other debts—in order to improve your credit score.
Read more:
About the author
