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Chapter 7 Cases |
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Chapter 7 Cases |
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Part 25. Special
Topics
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Chapter 17. Bankruptcy
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Section 7. Bankruptcy
Processing of Chapter 7 Cases
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25.17.7 Bankruptcy Processing of
Chapter 7 Cases
- 25.17.7.1
Introduction
- 25.17.7.2
Eligible
Entities
- 25.17.7.3
First
Meeting of Creditors
- 25.17.7.4
Referrals
to Insolvency
- 25.17.7.5
Automatic
Stay
- 25.17.7.6
Opening
the Chapter 7 Case
- 25.17.7.7
Proof
of Claim — Asset Cases
- 25.17.7.8
Chapter
7 No Asset Process
- 25.17.7.9
Chapter
7 Asset Process
- 25.17.7.10
Subordination
of Federal Tax Lien
- 25.17.7.11
Sale
of Property by the Trustee
- 25.17.7.12
Trust
Fund Recovery Penalty
- 25.17.7.13
Bankruptcy
Estate Income Taxes – I.R.C. § 1398
- 25.17.7.14
Postpetition
Liabilities— Individuals
- 25.17.7.15
Conversion
- 25.17.7.16
Dismissal
- 25.17.7.17
Distribution
- 25.17.7.18
The
Discharge Injunction
- 25.17.7.19
Discharge
- 25.17.7.20
Non-Dischargeable
Taxes
- 25.17.7.21
Collection
from Exempt or Abandoned Property
- 25.17.7.22
Grounds
for Denial of Discharge
- 25.17.7.23
Revocation
of a Discharge
25.17.7.1 (09-01-2004)
Introduction
1.
Chapter 7 Liquidation. Liquidation
under Chapter 7 of the Bankruptcy Code is the most common form of relief
sought by debtors. Chapter 7 is used primarily by
individuals to free themselves of debt simply and
inexpensively. Businesses wanting to liquidate and
terminate their business also file Chapter 7.
A.
Chapter 7
provides relief to the debtor regardless of the
amount of the debts owed or whether the debtor is
solvent or insolvent.
B.
The
debtor's assets are converted into cash for
distribution among creditors. Individual
debtors receive a discharge of all
prepetition debts other than certain debts which are
non-dischargeable under the Bankruptcy Code. (An
individual's right to a discharge through the filing
of a Chapter 7 petition is not absolute.)
C.
While
corporations and partnerships do not receive a
discharge, few, if any, assets remain from which to
collect tax liabilities not paid by the bankruptcy
estate.
D.
A
bankruptcy discharge does not extinguish a tax lien
on property.
2.
Parties.
A Chapter 7 bankruptcy involves three major parties:
A.
the debtor,
B.
the
trustee, and
C.
the
creditors
3.
Voluntary/Involuntary. A
case under Chapter 7 begins either by the filing of
a voluntary
petition by the debtor or by the filing
of an involuntary
petition by the creditors. See
25.17.7.1.1 (09-01-2004)
Notice and Filings
1.
Notice to
2.
Documents Filed. Bankruptcy
Rule 1007 requires the Chapter 7 debtor to file
supporting documents within a fixed time after
filing the petition. Such filings include a mailing
matrix, schedules, and a statement of financial
affairs.
25.17.7.1.2 (09-01-2004)
The Trustee
1.
Trustee's Role. In
general, a Chapter 7 liquidation is administered by
a trustee who collects all of the debtor's assets,
reduces the assets to cash, and distributes the
funds to creditors in the priority set forth in 11
U.S.C. § 726. The Chapter 7 trustee is a private
party who manages the bankruptcy estate on behalf of
creditors. The trustee is accountable to the court
for all actions taken on the case.
2.
Trustee's Selection. The trustee is appointed by the United States
Trustee’s Office, an officer of the United States
Department of Justice. A Chapter 7 trustee can also
be elected by creditors.
3.
Trustee Responsibilities. The
responsibility of collecting assets of the estate,
which may include converting property to cash,
avoiding improper liens, and setting aside
preferential, fraudulent, and/or unauthorized
postpetition transfers falls to the trustee. If the
business of the debtor is authorized to continue
operating under 11 U.S.C. § 721, the trustee may,
without notice or hearing, sell or lease property of
the estate in the ordinary course of business.
A.
The trustee
examines claims of creditors and objects to those
claims when appropriate.
B.
The trustee
is charged with investigating the finances of the
debtor.
C.
The trustee
files tax returns for the estate when required and
pays taxes if due.
D.
If the
debtor is uncooperative, found hiding assets, or is
otherwise interfering with the effective
administration of the case, the trustee may object
to the debtor's receiving a discharge.
E.
At the
conclusion of the case, the trustee must file a
final report with the court and the United States
Trustee. Any creditor, including the
25.17.7.2 (09-01-2004)
Eligible Entities
1.
Petitioners.
Any entity, with the exception
of governmental units, railroads,
insurance companies, banks and other financial
institutions, can file a Chapter 7 petition.
Eligible entities include:
·
individuals
·
corporations
·
partnerships
Reminder:
Only individuals may receive a
discharge.
2.
Joint Petitioners. When
a married couple files a Chapter 7 bankruptcy, a
joint petition may be filed by an individual and
spouse and can be administered by the same trustee.
25.17.7.3 (09-01-2004)
First Meeting of Creditors
1.
First Meeting of Creditors. After the filing of a Chapter 7 bankruptcy, a
first meeting of the creditors (also known as the
341 Meeting, 341 Hearing, or Section 341 Meeting) is
usually held within 20
– 40 days. The
debtor must attend and can be questioned by
creditors, including the
25.17.7.4 (09-01-2004)
Referrals to Insolvency
1.
Referrals to Insolvency. Compliance
employees must send an inquiry referral on Chapter 7
cases to Insolvency as soon as they learn a
bankruptcy has been filed (same day notification, if
possible). The referral to Insolvency may be made by
telephone or facsimile; or a written inquiry
referral can be sent, marked "expedite."
25.17.7.4.1 (09-01-2004)
Contact Points
1.
Contact Points. A
listing of contact points for local Insolvency
offices is available on the
25.17.7.5 (09-01-2004)
Automatic Stay
1.
The Automatic Stay. The
filing of a bankruptcy petition effects the automatic
stay. 11 U.S.C. § 362(a).
A.
The
automatic stay generally prohibits any act to obtain
possession of property of the bankruptcy estate or
to collect or recover a claim against the debtor
(taxpayer) that arose before the commencement of the
case.
B.
The stay
arises by operation of law as soon as the bankruptcy
petition, whether voluntary or involuntary, is filed
and requires no judicial action. It stays most
actions against the debtor or the debtor's property.
11 U.S.C. § 362.
2.
Duration of Stay. The
stay in a Chapter 7 case is in effect until the earliest
of the time the case is closed by the court or
dismissed, or, in an individual case, until the time
a discharge is granted or denied. The stay is lifted
at discharge against all property – including
exempt or abandoned property. However, the stay
against specific
property of the estate continues until such property
is no longer property of the estate (i.e., the
property is being administered by the trustee). See
3.
Limited Bankruptcy Timeframes. In
the majority of Chapter 7 individual cases, the
court grants a discharge shortly after the meeting
of creditors has been held and the period of time
has expired for creditors to file complaints
objecting to the debtor’s discharge. The period of
time from petition to discharge is usually
90 to 120 days
. Thus, the stay period and the statute
extension on any non-discharged tax are generally
short in Chapter 7 bankruptcy cases.
4.
Preventing Violations of the Automatic Stay. An
account in bankruptcy must remain under freeze codes
(TC 520s), and the Service must take all actions
possible to conform with the provisions of the
Bankruptcy Code to avoid violating the automatic
stay.
25.17.7.5.1 (09-01-2004)
Payments from Debtors on Dischargeable Taxes
1.
Payments Received on Dischargeable Tax. When
a payment is received from a debtor for a
dischargeable tax liability, the payment cannot be
retained by the Service. Corrective actions must be
initiated within two
workdays of
identification.
A.
If a
payment has already been received, deposited, and
applied to a dischargeable tax period by the
Service, the payment must be refunded expeditiously.
B.
To refund a
payment, Insolvency completes and expedites a Form
5792, using established manual refund procedures.
See
2.
Violations of the Bankruptcy Code. A
violation of the Bankruptcy Code must be handled
expeditiously to protect the debtor's rights. The
Service may be liable for damages when a stay
violation is not addressed timely.
Note:
If Insolvency is unsure if the refund
should be sent to the trustee or to the debtor,
guidance from Counsel should be sought.
25.17.7.5.2 (09-01-2004)
Voluntary Payments on Non-Dischargeable Taxes —
Prior Installment Agreement
1.
Non-Dischargeable Taxes. When a debtor continues to make voluntary
payments from postpetition earnings for
non-dischargeable taxes pursuant to a pre-existing
installment agreement after filing a Chapter 7
bankruptcy petition:
A.
the Service
can usually accept such payments, including
automatic debit payments, without violating the
automatic stay;
B.
Insolvency
should document the AIS history screen with all
pertinent information relating to such payments,
including any contacts made with the debtor on this
matter; and
C.
should
legal advice be required in this type of situation,
Insolvency must confer promptly with Counsel.
25.17.7.6 (09-01-2004)
Opening the Chapter 7 Case
1.
Asset/No Asset. Upon
receipt of a Chapter 7 case by Insolvency, each case
is categorized as either an asset or a no asset
case. Some bankruptcy courts simplify the asset/no
asset determination considering all Chapter 7
petitions as "no asset" until the court
issues a notice of possible dividend and sets a bar
date. Other courts issue separate notices
identifying the cases as either "asset" or
"no asset. "
Reminder:
All new cases must be loaded on AIS as
soon as possible. Initial processing of new cases
must be completed within
five workdays
of receipt, including the input of freeze
codes (TC 520s), in combination with appropriate
closing codes. See
2.
No Asset Case. A no asset case is defined, for
·
a case in
which the trustee determines " no
dividend" will be paid
·
a case in
which assets of the debtor are less than the allowed
exemptions and costs of administration
·
a case
involving a partnership or corporation where the
costs of administration exceed the value of the
assets
3.
Limited Follow–Up. In general, no asset cases require limited
follow-up. TC 520 with the applicable closing code
is input on all cases in which the
4.
Claim Not Filed. The Service does not file a proof of claim in
a no asset case. If the case converts to an asset
case at a later date, a claim may be filed.
5.
No Payments. The
6.
Asset Cases.
When the debtor has non-exempt assets, those assets can be available for use
in satisfying the claims of creditors.
A.
Complete Processing. Asset cases require complete processing, and in-depth research must be
conducted by Insolvency. See
B.
File Claim. The
Service should file a proof of claim, if
appropriate. See
7.
Unfiled Returns. The
Law Enforcement Manual (LEM) 5.5.3 and
Reminder:
Resources
should not be expended to file a claim if
circumstances of the case do not merit a claim.
25.17.7.7 (09-01-2004)
Proof of Claim — Asset Cases
1.
Filing of Claim. A
creditor, including the
2.
Procedures.
The procedures for filing claims in Chapter 7 are set forth in Bankruptcy
Rules 3001 and 3002. See
3.
Notice Given if Dividends Likely. The
court may initially conclude no assets exist in the
case but later determine a dividend payment is
possible. At that time, the court will issue a
notice for the filing of claims.
4.
Unassessed Claim. To
protect the government's interests, the
5.
Monitoring. If Insolvency files an unassessed claim based
on a pending assessment, it must monitor (follow-up)
for the receipt of more information from either the
debtor or the
6.
Claim Filed on Behalf of Creditor. If
a creditor (
7.
Objections to Claims. The
duty to object to any duplicative, overstated,
previously paid, or otherwise questionable proofs of
claim falls to the trustee. Objections to a claim
may also be made by other parties, including, for
example, the debtor.
25.17.7.7.1 (09-01-2004)
Bar Date
1.
Timeframe.
To be considered timely, a Chapter 7 proof of claim must be filed with the
bankruptcy court:
A.
in the first
180 days of the bankruptcy (i.e.,
before the 180-day period has run after the order
for relief, generally meaning the petition date); or
B.
sometime within
the 90-day time
period after the 341 Hearing.
2.
Late Claim Allowed if Filed Pre-Distribution. In
a Chapter 7 case, if a claim is untimely filed, the
3.
Extension of Bar Date. The
25.17.7.8 (09-01-2004)
Chapter 7 No Asset Process
1.
The Typical Chapter 7 No Asset Process:
a.
The
petition is filed.
b.
The 341
Meeting of Creditors is held.
c.
The trustee
checks for assets.
d.
The trustee
approves and files no asset report.
e.
The court
enters discharge (normally 90
to 120 days after the filing of the
petition), or enters denial of the discharge (for
individuals).
f.
The court
approves no asset report; the court excuses the
trustee; and the case is closed.
25.17.7.9 (09-01-2004)
Chapter 7 Asset Process
1.
The Typical Chapter 7 Asset Process:
a.
The
petition is filed.
b.
The 341
Meeting of Creditors is held.
c.
The trustee
files an interim report of assets.
d.
The trustee
checks for any additional assets.
e.
A proof of
claim is filed.
f.
The court
enters discharge (for individuals).
g.
The trustee
administers case, including 1) liquidating all
assets that create a benefit for the estate; 2)
objecting to questionable proofs of claim; 3)
determining the distribution of proceeds; and 4)
filing a final report.
25.17.7.10 (09-01-2004)
Subordination of Federal Tax Lien
1.
Subordination. 11 U.S.C. § 724(b) provides for the
distribution of the proceeds of property encumbered
by a valid prepetition tax lien. Specifically, it
provides that holders of unsecured priority claims
under 11 U.S.C. § 507(a)(1) through § 507(a)(7)
are paid before the holder of the tax lien is paid.
This is referred to as a subordination
of the tax lien (taking a lower
position). See
2.
Administrative Expenses. The Service's claim for administrative
expenses that accrue during the bankruptcy
proceeding is entitled to priority classification
under 11 U.S.C. § 507(a)(1). Accordingly, the
Service's secured tax claim will be subordinated to
the payment of the Service's administrative tax
claim, if any.
Note:
In addition to the federal secured tax
claim, state and local secured tax claims are also
subordinated.
25.17.7.11 (09-01-2004)
Sale
of Property by the Trustee
1.
Lien Interest. When the trustee disposes of the debtor's
assets by selling property, and the
2.
Certificate of Discharge. A
need to issue a Certificate of Discharge may arise,
if requested, to clear title concerns after the
completion of a sale. If appropriate, a no interest
lien discharge may be considered. See
3.
Post-Discharge Liens. Tax
liens filed against the individual debtor after a
discharge from bankruptcy is granted may interfere
with the sale of estate property. The
4.
Tax Consequences. The
U.S. Trustee encourages trustees to evaluate the tax
aspects of any sale and discourages them from
administering any property with significant tax
consequences.
5.
Objections to
Note:
If any estate property is subsequently
abandoned to the debtor, the federal tax lien
attaches to the property upon abandonment.
25.17.7.12 (09-01-2004)
Trust Fund Recovery Penalty
1.
Corporation and Responsible Officers in Bankruptcy. Assessment
of the Trust Fund Recovery Penalty (TFRP) under
I.R.C. § 6672 becomes an issue when a corporation,
having unpaid trust fund liabilities, files a
Chapter 7 petition. In addition, the potentially
responsible persons of the corporation may have
filed their own bankruptcy petitions.
2.
Objections Filed by Responsible Persons. The
responsible persons frequently object to the TFRP
investigation the
3.
Field Compliance Assignment. If research on corporate asset Chapter 7 cases
shows balance due accounts or return delinquency
periods assigned to field Compliance, Insolvency
should contact with the revenue officer (RO) group
to determine what information is available on the
case.
4.
Other Investigations (OIs). If an OI for investigation of the TFRP is
warranted, it will be based on TFRP criteria
concerning dollar amounts and collectibility
factors.
5.
TFRP Assessments Against Responsible Persons.
A.
Generally,
Insolvency will recommend immediate
assertion of the TFRP.
B.
If the
decision is made not to assess, Insolvency must
indicate the reasons for non-assertion in the case
history. The decision on withholding the TFRP
assessment should be reviewed with the manager in
accordance with local procedures.
Caution:
Should
any of the circumstances/factors change at a later
date that allowed Insolvency to originally delay the
TFRP assessment (e.g., a current review indicates
non-compliance, plan deficiencies, etc.),
reconsideration should be given to making the TFRP
assessment.
6.
Field Assignment of Accounts. If a revenue officer group wants an account to
remain open to field Compliance, TC520 with closing
code 84 will not suspend a balance due account for
the module to which it is input.
Caution:
Although
CC 84 is available for use in circumstances that
require extensive field work and involve little risk
in committing a violation of the Bankruptcy Code,
caution must still be employed. The Service can be
liable for damages if a violation of the Bankruptcy
Code occurs.
25.17.7.13 (09-01-2004)
Bankruptcy Estate Income Taxes – I.R.C. § 1398
1.
Individual Chapter 7 – Separate Taxable Entity. The
bankruptcy estate in an individual Chapter 7
bankruptcy is a separate taxable entity required to
file its own Form 1041.
A.
I.R.C. §
1398 contains special provisions for an individual
under Chapter 7.
B.
Individual
debtors have the right to terminate their tax years
when the petition is filed.
C.
The Chapter
7 trustee has a duty to file the estate's tax
return.
D.
The return
filing requirements are generally the same as for
individual Chapter 11 cases, as discussed in
2.
Corporations and Partnerships – No Separate Taxable Entity. In
corporate and partnership Chapter 7 cases, as well
as in Chapter 11 cases, no separate taxable entity
is created. I.R.C. § 1399.
A.
The trustee
is responsible for filing any required returns.
B.
A trustee
can apply to be relieved of the filing requirements
in corporate cases when the corporation has neither
assets nor income. The procedures are found in
Revenue Procedure 84–59. They require the trustee
to make a written request giving the reasons and
must be signed under penalties of perjury.
C.
Insolvency
will make the determination to grant or deny the
request within 90 days
of receipt of the request.
25.17.7.14 (09-01-2004)
Postpetition Liabilities— Individuals
1.
Rule for Individuals – Chapter 7 Postpetition Debts. In
a Chapter 7 proceeding, the individual debtor is
considered to be a separate taxable entity from the
estate. Taxes on the individual debtor's
postpetition wages are incurred by the individual
debtor, while taxes on income arising from assets
which are property of the estate are incurred by the
estate. Therefore, a postpetition liability incurred
by an individual debtor (rather than the estate) in
a Chapter 7 proceeding cannot be claimed in the
bankruptcy case.
25.17.7.15 (09-01-2004)
Conversion
1.
Voluntary.
Chapter 7 debtors may voluntarily convert
their cases to proceedings under Chapters 11, 12, or
13 at any time, as long as the Chapter 7 case was
not originally converted from a Chapter 11, 12, or
13 proceeding.
2.
Involuntary.
Involuntary
conversions to Chapter 11 sought by creditors or the
trustee can also occur.
25.17.7.16 (09-01-2004)
Dismissal
1.
Notice and Hearing. A
Chapter 7 case may be dismissed "for cause
" only after notice and a hearing. 11 U.S.C. §
707(a).
2.
Causes for Dismissal. Reasons
( "causes" ) a debtor's bankruptcy may be
dismissed include:
·
unreasonable
delay by the debtor that is prejudicial to creditors
·
non-payment
of any fees or charges
·
failure of
the debtor in a voluntary case to file schedules as
required by 11 U.S.C. § 521, but only on motion of
the U.S. Trustee
3.
Abuse of Bankruptcy Process. The court, on its own motion or on a motion by
the United States Trustee, may dismiss the case on
other grounds if granting relief would be a
substantial abuse of the bankruptcy process. Grounds
for dismissal could include:
·
bad faith
in filing the petition
·
debts
consisting of primarily consumer debts
25.17.7.17 (09-01-2004)
Distribution
1.
Order of Distribution. The
order of distribution in a Chapter 7 case for estate
property not subject to liens is established in 11
U.S.C. § 726 and is as follows:
a.
11 U.S.C.
§ 507 priority claims (includes administrative
expenses, postpetition taxes incurred by the estate,
including interest on these taxes, and priority tax
claims) which are timely filed, or which are
untimely filed before the trustee begins
distribution;
b.
general
unsecured claims which are timely filed, or filed
late due to lack of notice;
c.
late claims
(other than those in items (1) and (2));
d.
non-pecuniary
loss penalties (punitive in nature, for example,
failure to pay) and fines;
e.
postpetition
interest; and lastly,
f.
the debtor
receives the remainder of any distribution.
2.
Rights of a Private Secured Party. The
distribution does not affect the rights of a private
secured party. If property in which a secured party
has a lien is sold by the trustee, that creditor
will be paid first from the sale proceeds after the
expenses of the sale.
3.
Treatment of
25.17.7.18 (09-01-2004)
The Discharge Injunction
1.
Discharge Injunction. Under
11 U.S.C. § 524, Effect of
Discharge, a discharge operates as an
injunction against the continuation or commencement
of any act to collect the discharged debt.
2.
Service Prohibition. The
Service can be liable for damages if the discharge
injunction is violated. See I.R.C. § 7433(e).
Insolvency must take timely and precautionary
measures when adjusting accounts having discharged
liabilities to prevent violations of the discharge
injunction under 11 U.S.C. § 524.
3.
Collection Caution. The
Service, therefore, is prohibited from taking any
actions to collect, recover, or offset against
postpetition refunds any discharged debt against the
debtor. General collection actions that must not be
taken include sending balance due notices, serving
wage levies, and making offsets of postpetition
refunds to discharged liabilities. See
Caution:
As
the majority of discharge injunction violations
occur in Chapter 7 cases, Insolvency employees
assigned Chapter 7 casework must be diligent while
working on discharge processing procedures.
25.17.7.19 (09-01-2004)
Discharge
1.
Effect of Discharge. Generally,
a Chapter 7 discharge relieves an individual debtor
from liability for most prepetition debts. It
operates as an injunction against any collection
action to recover discharged debts from the debtor.
In effect, the discharge extinguishes the debtor's
personal obligations on debts. Creditors, including
the
2.
Discharge Law Complex. The
bankruptcy law regarding the scope of a Chapter 7
discharge is complex. Counsel should be consulted
for legal guidance, as necessary.
3.
Tax Discharge Determination. When
an individual debtor receives a discharge in Chapter
7, Insolvency must do a quality, timely review of
the debtor's accounts to determine which taxes are
excepted from the discharge.
4.
Valid Tax Lien/Exempt or Abandoned Property. Attention
must be given to a valid Notice of Federal Tax Lien
filed prior to the bankruptcy filing date. The lien
may attach to exempt or abandoned assets with
collection potential. See
5.
Early Discharge in Chapter 7s. In
most cases, unless a complaint has been filed
objecting to the discharge, the discharge will be
granted to an individual Chapter 7 debtor relatively
early in the case. This generally happens 60
– 90 days
after the date first set for the meeting
of the creditors.
Reminder:
Chapter
7 Discharge Available Only to Individuals. Partnerships
and corporations cannot receive a Chapter 7
discharge – only individuals. However, since
Chapter 7 is a liquidation proceeding, usually no
assets remain from which to collect any tax
liabilities not paid by the bankruptcy estate.
6.
Quality Documentation. All
closing actions taken on Chapter 7 cases, including
justifications for discharge determinations, must be
properly and timely documented on AIS. Not only is
this information important to Insolvency, but other
Service employees (e.g., Counsel, Examination) can
benefit from detailed and concise dischargeability
documentation if they use the AIS history screen
"read only " option.
25.17.7.19.1 (09-01-2004)
Discharge Timeframes
1.
Timeframe Requirement – Discharge Processing. Insolvency
is required to initiate all of the required closing
actions necessary for discharge processing within
30 calendar days
of the receipt of the discharge notice.
Discharge determinations must be made, Other
Investigations (OIs) sent to field
Compliance under appropriate situations, and
adjusting actions started within the 30 day
timeframe.
Note:
Sometimes a delay in closing a case on
AIS is unavoidable, such as when awaiting results
from an OI investigation. If additional time is
needed, the Insolvency employee working the
discharge should obtain managerial concurrence.
However, the OI investigation should be concluded as
promptly as possible.
2.
Freeze Code Release Caution. Insolvency must ensure the bankruptcy freeze
codes remain in force until all bankruptcy discharge
procedures have been completed.
25.17.7.20 (09-01-2004)
Non-Dischargeable Taxes
1.
Non-Dischargeable Taxes. According to 11 U.S.C. § 523(a), certain tax
debts are not dischargeable, including:
A.
priority
taxes (see table in
B.
trust fund
taxes;
C.
taxes for
which a late return was filed within two years of
the bankruptcy filing;
D.
taxes for
which a return was not filed; or
E.
taxes
resulting from a fraudulent
return or from willful
attempts to evade or defeat the tax.
2.
Willful Evasion. Insolvency must not take collection action or remove bankruptcy freeze codes
from discharged tax years on the ground that the
willful evasion exception applies without first
consulting Counsel.Compliance employees must receive all necessary written
approvals through Counsel for
assertion of this exception to discharge.
3.
Collection Activity. While a Chapter 7 individual debtor may be
granted a general discharge, actions may be taken to
collect 11 U.S.C. § 523 non-dischargeable
liabilities once the automatic stay is terminated.
The
25.17.7.21 (09-01-2004)
Collection from Exempt or Abandoned Property
1.
Dischargeable Taxes and Lien Rights. Discharged
taxes may be collectible from exempt property or
property that has been abandoned, or otherwise not
administered by the trustee, if
a valid prepetition Notice of Federal Tax Lien is on
file against an individual Chapter 7 debtor.
See
Note:
Exempt property can also include pension
plan assets.
2.
Inclusion of Non-Dischargeable Taxes. While
collection efforts may be ongoing from Insolvency at
the closing of a bankruptcy for dischargeable taxes,
the Service is not prohibited from including any
non-dischargeable taxes the debtor may owe.
Reminder:
Non-Dischargeable
Taxes/Individuals.
The
3.
ERISA.
Included among the assets the federal tax lien can attach are Employee
Retirement Income Security Act
(ERISA)-qualified pension plans which are generally
not included in the bankruptcy estate — pursuant
to Patterson v.
Shumate,504 U.S. 753 (1992)
. See
4.
Timeframe for Adjusting Accounts. Insolvency
is required to initiate all necessary discharge
closing actions within 30
calendar days
of the receipt of the discharge order,
including the initiation of an OI for an
exempt/abandoned asset investigation. If an OI is
sent, the investigation should be concluded as soon
as possible. Any issues or concerns should be
brought to the attention of the debtor or debtor's
attorney for a prompt resolution.
5.
Preventing Violations of the Discharge Injunction. To
prevent violations of the discharge injunction, the
account(s) must be kept under TC 520 (freeze code)
control to prevent notices from being generated and
offsets made to dischargeable periods, pending a
determination of the exempt or abandoned property
issues. See
6.
When to Make Adjustments. In most instances, when an OI is outstanding,
adjustments should not be made on the tax accounts,
nor lien(s) released on dischargeable tax
liabilities secured by a valid NFTL, until
the collection potential of such property has been
determined.
Caution:
Insolvency
must exercise caution as any undue delay in
releasing the bankruptcy freeze may increase the
risk of a refund violation.
7.
Related
25.17.7.22 (09-01-2004)
Grounds for Denial of Discharge
1.
Bankruptcy Code Rules. 11 U.S.C. § 727 details the ground rules for
determining whether or not to grant a Chapter 7
individual debtor a discharge of prepetition debts.
If a discharge is denied under this section, none of
the debtor's debts will be discharged.
2.
Reasons for Denial of Discharge. A
bankruptcy court may deny a discharge when a Chapter
7 individual debtor:
A.
attempts
to, or does defraud the estate by described
affirmative acts or by withholding information from
estate officers;
B.
cannot
explain loss or deficiency of assets;
C.
commits an
act outlined in above-listed items within
one year before
or during the case and in connection with another
case concerning an insider;
D.
fails to
keep books and records from which to ascertain the
debtor's financial condition;
E.
fails to
obey any court order;
F.
received a
discharge in a Chapter 7 or a Chapter 11 case
commenced within six
years of
the filing of the current bankruptcy; or
G.
received a
Chapter 12 or Chapter 13 discharge in a case
commenced within six
years of
the filing date of the current bankruptcy, but
failed to perform certain required acts in
connection with the prior bankruptcy; or
H.
transfers,
conceals, or destroys property, with intent to
defraud, within one
year before
the bankruptcy petition or takes the same actions
toward estate property after the petition filing.
3.
Counsel Consult. If
it appears the debtor may have committed an act
justifying a denial of discharge, Counsel should
promptly be contacted for consideration of the
government's objecting to the discharge.
25.17.7.23 (09-01-2004)
Revocation of a Discharge
1.
Revocation Criteria. A
discharge may be revoked by the court upon the
request of the trustee, a creditor, or the United
States Trustee, if:
A.
the
discharge was obtained through fraud which the
requesting party did not know of until after the
discharge was granted and the request was made within
one year after
the discharge was granted;
B.
the debtor
acquired property of the estate and knowingly and
fraudulently failed to report the acquisition of or
entitlement to property of the estate, or failed to
surrender same to the trustee; or
C.
the debtor
refused to obey a lawful order of the court, or to
respond to a material question approved by the
court, or to testify (other than on the ground of
privilege against self-incrimination).
Timeframe for
Request. A revocation request
pursuant to (b) or (c) above must be made before the
later
of one year after the granting of the
discharge or
the date the case is closed under certain
conditions. 11 U.S.C. §§ 72 7(e)(1), 727(e)(2)(A),
727(e)(2)(B).