Chapter 7 Cases
Part 25. Special
Chapter 17. Bankruptcy
Section 7. Bankruptcy
Processing of Chapter 7 Cases
25.17.7 Bankruptcy Processing of
Chapter 7 Cases
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.
provides relief to the debtor regardless of the
amount of the debts owed or whether the debtor is
solvent or insolvent.
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.)
corporations and partnerships do not receive a
discharge, few, if any, assets remain from which to
collect tax liabilities not paid by the bankruptcy
bankruptcy discharge does not extinguish a tax lien
A Chapter 7 bankruptcy involves three major parties:
case under Chapter 7 begins either by the filing of
petition by the debtor or by the filing
of an involuntary
petition by the creditors. See
18.104.22.168, Glossary –
Notice and Filings
of a Chapter 7 bankruptcy filing must be given to
the Service when the
is listed as a creditor in the debtor's schedules.
Bankruptcy Rule 2002(f).
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
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.
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.
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.
examines claims of creditors and objects to those
claims when appropriate.
is charged with investigating the finances of the
files tax returns for the estate when required and
pays taxes if due.
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.
conclusion of the case, the trustee must file a
final report with the court and the United States
Trustee. Any creditor, including the
, may object to this report.
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:
Only individuals may receive a
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.
First Meeting of Creditors
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
, concerning financial affairs, debts, and property
issues. The trustee attends and also questions the
debtor. The Service can obtain pertinent information
at the 341 Meeting on such matters as trust fund
taxes (including names, duties, and responsibilities
of officers), assets, unfiled tax returns, and
employment tax obligations.
Referrals to Insolvency
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."
Contact Points. A
listing of contact points for local Insolvency
offices is available on the
Intranet through SERP for prompt resolution of
bankruptcy-related issues. Local Insolvency offices
must ensure changes in their phone or fax numbers
are reflected on the SERP directory. Insolvency
employees should also keep a list of contacts for
functions with which they deal on a regular basis.
The Automatic Stay. The
filing of a bankruptcy petition effects the automatic
stay. 11 U.S.C. § 362(a).
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
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.
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
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
22.214.171.124, The Effect of
Bankruptcy on Collection,including (2), Table
– Showing How Bankruptcy
Can Affect Collection.
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.
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
Payments from Debtors on Dischargeable Taxes
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
payment has already been received, deposited, and
applied to a dischargeable tax period by the
Service, the payment must be refunded expeditiously.
To refund a
payment, Insolvency completes and expedites a Form
5792, using established manual refund procedures.
126.96.36.199.1, Manual Refunds
– Form 5792.
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.
If Insolvency is unsure if the refund
should be sent to the trustee or to the debtor,
guidance from Counsel should be sought.
Voluntary Payments on Non-Dischargeable Taxes —
Prior Installment Agreement
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
can usually accept such payments, including
automatic debit payments, without violating the
should document the AIS history screen with all
pertinent information relating to such payments,
including any contacts made with the debtor on this
legal advice be required in this type of situation,
Insolvency must confer promptly with Counsel.
Opening the Chapter 7 Case
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. "
All new cases must be loaded on AIS as
soon as possible. Initial processing of new cases
must be completed within
of receipt, including the input of freeze
codes (TC 520s), in combination with appropriate
closing codes. See
Interface Program (IIP), and
188.8.131.52.1, Timeframes –
Initial Case Processing Actions.
No Asset Case. A no asset case is defined, for
purposes, as any of the following:
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
involving a partnership or corporation where the
costs of administration exceed the value of the
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
is listed as a creditor to ensure the automatic stay
is not violated.
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.
No Payments. The
and other creditors do not receive any payments (or
dividends) from the bankruptcy estate in a no asset
When the debtor has non-exempt assets, those assets can be available for use
in satisfying the claims of creditors.
Complete Processing. Asset cases require complete processing, and in-depth research must be
conducted by Insolvency. See
25.17.5, Opening a
File Claim. The
Service should file a proof of claim, if
184.108.40.206, Proof of Claim
– Asset Cases.
Unfiled Returns. The
Law Enforcement Manual (LEM) 5.5.3 and
220.127.116.11 outline criteria concerning unfiled
should not be expended to file a claim if
circumstances of the case do not merit a claim.
Proof of Claim — Asset Cases
Filing of Claim. A
creditor, including the
, must file a proof of claim in an asset Chapter 7
case to share in the distribution of the estate.
The procedures for filing claims in Chapter 7 are set forth in Bankruptcy
Rules 3001 and 3002. See
25.17.6, Proof of Claim.
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.
Unassessed Claim. To
protect the government's interests, the
can file an unassessed (estimated) claim when the
exact amount of a debtor's liability is unknown
(e.g., unfiled returns, TFRP under investigation,
pending audit). However, the claim must have a
factual basis. The government should be in a
position to show the court the liability is
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
function proposing the assessment. After all pending
actions are completed, Insolvency may amend or
withdraw the claim, if appropriate. Note
18.104.22.168(8), Withdrawal of
Unassessed Claim, and (9), Unfiled
Claim Filed on Behalf of Creditor. If
a creditor (
) does not file a proof of claim, the debtor or the
trustee may file a claim on behalf of the creditor.
The Service generally then files a corrected claim,
or an amendment, with the court, showing accurate
tax figures based on the
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.
To be considered timely, a Chapter 7 proof of claim must be filed with the
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
the 90-day time
period after the 341 Hearing.
Late Claim Allowed if Filed Pre-Distribution. In
a Chapter 7 case, if a claim is untimely filed, the
can still receive full payment of priority tax
claims as long as the claim is filed before
the trustee begins distribution.
Extension of Bar Date. The
may request the bankruptcy court permit an extension
of the time to file a claim prior to the expiration
of the 90-day period
after the first date set for the meeting
of creditors, or the 180-day
period after the order for relief.
Insolvency should consult with Counsel, if
necessary, to determine if an extension is merited.
22.214.171.124.1.1, Bar Date
Chapter 7 No Asset Process
The Typical Chapter 7 No Asset Process:
petition is filed.
Meeting of Creditors is held.
checks for assets.
approves and files no asset report.
enters discharge (normally 90
to 120 days after the filing of the
petition), or enters denial of the discharge (for
approves no asset report; the court excuses the
trustee; and the case is closed.
Chapter 7 Asset Process
The Typical Chapter 7 Asset Process:
petition is filed.
Meeting of Creditors is held.
files an interim report of assets.
checks for any additional assets.
A proof of
claim is filed.
enters discharge (for individuals).
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.
Subordination of Federal Tax Lien
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
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.
In addition to the federal secured tax
claim, state and local secured tax claims are also
of Property by the Trustee
Lien Interest. When the trustee disposes of the debtor's
assets by selling property, and the
has a valid prepetition federal tax lien on file,
the Service's lien interest in such property is
unknown until all priority claims, including
administrative expenses, are determined. Thus
Insolvency should not interfere with, or object to,
any sale of property by the trustee without specific
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
of Property Considerations,
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
holds the position that, because the bankruptcy
estate is a separate entity, such post-discharge
liens do not attach to estate property. Therefore, a
no interest lien discharge
may be provided.
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
employees should review sale motions with the tax
consequences in mind and object to sales when
appropriate, as provided in
If any estate property is subsequently
abandoned to the debtor, the federal tax lien
attaches to the property upon abandonment.
Trust Fund Recovery Penalty
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.
Objections Filed by Responsible Persons. The
responsible persons frequently object to the TFRP
conducts against them, claiming the trust fund taxes
will be paid through the corporate bankruptcy
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
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
TFRP Assessments Against Responsible Persons.
126.96.36.199(14) provides the TFRP should
generally be assessed against the responsible
persons of a corporate Chapter 7 debtor case unless compelling evidence exists that the assets of
the estate are sufficient to satisfy all of the
liabilities of the debtor (which is rare).
Insolvency will recommend immediate
assertion of the TFRP.
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.
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
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.
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
Bankruptcy Estate Income Taxes – I.R.C. § 1398
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.
1398 contains special provisions for an individual
under Chapter 7.
debtors have the right to terminate their tax years
when the petition is filed.
7 trustee has a duty to file the estate's tax
filing requirements are generally the same as for
individual Chapter 11 cases, as discussed in
188.8.131.52, Internal Revenue
Code § 1398 Issues.
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.
is responsible for filing any required returns.
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.
will make the determination to grant or deny the
request within 90 days
of receipt of the request.
Postpetition Liabilities— Individuals
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
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
conversions to Chapter 11 sought by creditors or the
trustee can also occur.
Notice and Hearing. A
Chapter 7 case may be dismissed "for cause
" only after notice and a hearing. 11 U.S.C. §
Causes for Dismissal. Reasons
( "causes" ) a debtor's bankruptcy may be
delay by the debtor that is prejudicial to creditors
of any fees or charges
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
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:
in filing the petition
consisting of primarily consumer debts
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:
§ 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
unsecured claims which are timely filed, or filed
late due to lack of notice;
(other than those in items (1) and (2));
loss penalties (punitive in nature, for example,
failure to pay) and fines;
interest; and lastly,
receives the remainder of any distribution.
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.
Tax Lien. The
, as a secured creditor, does not have the same
rights as private secured creditors in a Chapter 7
case. This is because the
tax lien is subordinated to priority claims,
including administrative expenses of the estate,
pursuant to 11 U.S.C. § 724. Other priority claims
will be paid before the tax lien is paid. See
184.108.40.206, Subordination of
Federal Tax Lien, and
of Property by the Trustee.
The Discharge Injunction
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.
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.
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
220.127.116.11, Collection from
Exempt or Abandoned Property, and
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.
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
, must not take any action in violation of 11 U.S.C.
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.
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.
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
18.104.22.168, Collection from
Exempt or Abandoned Property.
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.
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.
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.
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
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.
Freeze Code Release Caution. Insolvency must ensure the bankruptcy freeze
codes remain in force until all bankruptcy discharge
procedures have been completed.
Non-Dischargeable Taxes. According to 11 U.S.C. § 523(a), certain tax
debts are not dischargeable, including:
taxes (see table in
which a late return was filed within two years of
the bankruptcy filing;
which a return was not filed; or
resulting from a fraudulent
return or from willful
attempts to evade or defeat the tax.
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.
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.
can collect non-dischargeable liabilities from
exempt, abandoned, non-administered, and
after-acquired assets of an individual debtor.
Postpetition interest on non-dischargeable taxes is
also non-dischargeable. See
Discharges – Impact on the Overall Collection
22.214.171.124, Discharge and
Exceptions to Discharge.
Collection from Exempt or Abandoned Property
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.
from Exempt Property After Discharge.
Exempt property can also include pension
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.
has the right to collect non-dischargeable
liabilities from exempt, abandoned,
non-administered, and after-acquired assets of an individual
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)
Timeframe for Adjusting Accounts. Insolvency
is required to initiate all necessary discharge
closing actions within 30
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.
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
126.96.36.199, The Discharge
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
must exercise caution as any undue delay in
releasing the bankruptcy freeze may increase the
risk of a refund violation.
From Exempt Property After Discharge;
188.8.131.52, Property of the
Abandoned Property; and
and Exempt or Abandoned Property, give
additional information on potential collection from
specific property at the closing of a bankruptcy.
Grounds for Denial of Discharge
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.
Reasons for Denial of Discharge. A
bankruptcy court may deny a discharge when a Chapter
7 individual debtor:
to, or does defraud the estate by described
affirmative acts or by withholding information from
explain loss or deficiency of assets;
act outlined in above-listed items within
one year before
or during the case and in connection with another
case concerning an insider;
keep books and records from which to ascertain the
debtor's financial condition;
obey any court order;
discharge in a Chapter 7 or a Chapter 11 case
commenced within six
the filing of the current bankruptcy; or
Chapter 12 or Chapter 13 discharge in a case
commenced within six
the filing date of the current bankruptcy, but
failed to perform certain required acts in
connection with the prior bankruptcy; or
conceals, or destroys property, with intent to
defraud, within one
the bankruptcy petition or takes the same actions
toward estate property after the petition filing.
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.
Revocation of a Discharge
Revocation Criteria. A
discharge may be revoked by the court upon the
request of the trustee, a creditor, or the United
States Trustee, if:
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;
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
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).
Request. A revocation request
pursuant to (b) or (c) above must be made before the
of one year after the granting of the
the date the case is closed under certain
conditions. 11 U.S.C. §§ 72 7(e)(1), 727(e)(2)(A),