Chapter 7 Cases

Home Services FAQ Site Map Contact Us
Articles by Alvin Brown
Tax Preparation
Offer In Compromise
State Offers in Compromise
Levy
IRS Tax Liens
IRS Tax Liens - continued
IRS Tax Liens - continued 2
Levy - continued
Audit Techniques Guide
Congressional Contacts
Criminal Investigation
D.O.J Criminal Tax Manual
Tax Litigation
Penalty
Installment Agreements
Statute of Limitations
Frivolous Tax Argument
Interest Abatement
IRS Misconduct
IRS Abuses
Tax Fraud
Fraud Statutes
Bankruptcy
Tax Reform Legislation
Tax Shelters
Tax Court
Trust Fund Penalty
Legislation
Innocent Spouse Relief
Important Links

Overview
Bankruptcy Terms
Bankruptcy Legislation
Bankruptcy Section 6658
Bankruptcy Fraud
Statute of Limitations
Golden Parachute
Definition of "pending"
Chapter 9 Cases
Collection
Delinquent Accounts
Common Issues
IRS Case Processing
Proof of Claim
Chapter 7 Cases
Payments
Chapter 11
Chapter 12
Chapter 13
Closing

 
Chapter 7 Cases

Back Next

Part 25. Special Topics

Chapter 17. Bankruptcy

 

 

Section 7. Bankruptcy Processing of Chapter 7 Cases

25.17.7  Bankruptcy Processing of Chapter 7 Cases

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 IRM 25.17.1.6, Glossary – Bankruptcy Terms.

25.17.7.1.1  (09-01-2004)
Notice and Filings

1.       Notice to IRS . Notice of a Chapter 7 bankruptcy filing must be given to the Service when the IRS is listed as a creditor in the debtor's schedules. Bankruptcy Rule 2002(f).

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 IRS , may object to this report.

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 IRS , 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.

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 IRS 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 other IRS functions with which they deal on a regular basis.

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 IRM 25.17.2.9, The Effect of Bankruptcy on Collection,including (2), Table – Showing How Bankruptcy Can Affect Collection.

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 IRM 25.17.4.3.1, Manual Refunds – Form 5792.

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 IRM 25.17.5.5, Insolvency Interface Program (IIP), and IRM 25.17.5.5.1, Timeframes – Initial Case Processing Actions.

2.       No Asset Case. A no asset case is defined, for IRS 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

·         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 IRS is listed as a creditor to ensure the automatic stay is not violated.

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 IRS and other creditors do not receive any payments (or dividends) from the bankruptcy estate in a no asset case.

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 IRM 25.17.5, Opening a Bankruptcy Case.

B.      File Claim. The Service should file a proof of claim, if appropriate. See IRM 25.17.7.7, Proof of Claim – Asset Cases.

7.       Unfiled Returns. The Law Enforcement Manual (LEM) 5.5.3 and IRM 25.17.4.13 outline criteria concerning unfiled returns.

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 IRS , must file a proof of claim in an asset Chapter 7 case to share in the distribution of the estate.

2.       Procedures. The procedures for filing claims in Chapter 7 are set forth in Bankruptcy Rules 3001 and 3002. See IRM 25.17.6, Proof of Claim.

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 IRS 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 reasonable. See IRM 25.17.6.8, Unassessed Claims.

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 IRS function proposing the assessment. After all pending actions are completed, Insolvency may amend or withdraw the claim, if appropriate. Note IRM 25.17.6.8(8), Withdrawal of Unassessed Claim, and (9), Unfiled Returns.

6.       Claim Filed on Behalf of Creditor. If a creditor ( IRS ) 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 IRS tax database.

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 IRS can still receive full payment of priority tax claims as long as the claim is filed before the trustee begins distribution.

3.       Extension of Bar Date. The IRS 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. See IRM 25.17.6.7.1.1, Bar Date Extension.

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 IRM 25.17.7.17, Distribution, and IRM 25.17.4.4.1(4), Certificate of Discharge.

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 IRS 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 cause.

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 IRM 25.17.4.4.1, Sale of Property Considerations, and IRM 25.17.4.4.1(4), Certificate of Discharge.

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 IRS 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.

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.