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Chapter 13

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Part 25. Special Topics

Chapter 17. Bankruptcy

 

 

Section 13. Bankruptcy Processing of Chapter 13 Cases


25.17.13  Bankruptcy Processing of Chapter 13 Cases

25.17.13.1  (09-01-2004)
Introduction

1.       Reorganization of Debts for Individuals. A Chapter 13 bankruptcy represents a voluntary reorganization of debts for individuals. The debtors, who retain all of their assets, commit a portion of their future income to repay creditors. Proceedings range from 36 to 60 months, with 60 months being the most common timeframe. This chapter is not available to corporations or partnerships, but only to individuals (wage earners and sole proprietors).

2.       Chapter 13 Trustee. A court-appointed trustee oversees the administration of a Chapter 13 bankruptcy. Because the trustee is an integral player in a Chapter 13 bankruptcy, an ongoing dialogue should be established with the trustee so administrative problems can be addressed and resolved early. The Chapter 13 trustee:

A.      is an agent of the court;

B.      oversees the fair and economical administration of cases;

C.      ensures all creditors receive an equitable distribution;

D.      receives periodic payments from the debtor; and

E.      distributes periodic payments to creditors.

3.       Protection of the Government's Interests. Sometimes the interests of other creditors compete with the interests of the IRS . Because confirmation hearings take place early in Chapter 13 proceedings, Insolvency must work quickly to protect the government's interests.

25.17.13.2  (09-01-2004)
Chapter 13 Eligibility

1.       Criteria. 11 U.S.C. § 109(e) describes four tests the debtor must meet to file under Chapter 13:

a.       The debtor must be an individual, or an individual and spouse, who can file jointly; exceptions, a stockbroker or a commodities broker cannot be a debtor in Chapter 13;

b.       The debtor must have regular income (including income from self-employment);

c.       Secured debts must total less than $922,975; and

d.       Unsecured debts must total less than $307,675.

Note:

These limitations became effective April 1, 2004 . The debt ceilings are for all debts, not just tax debts.

2.       Eligibility/Automatic Adjustments. As required under 11 U.S.C. § 104(b), the Chapter 13 dollar amounts are automatically adjusted at three-year intervals to reflect changes in the Consumer Price Index. As required under 11 U.S.C. § 104(b)(2), the next three-year automatic adjustments of the dollar amounts affecting the eligibility of a debtor to file Chapter 13 will occur on April 1, 2007 .

25.17.13.3  (09-01-2004)
Preliminary Issues

1.       Pre-Bankruptcy Collection Actions. Activity in other Compliance functions may be pending or ongoing when the bankruptcy is filed (for example, a revenue officer may have outstanding levies). Coordination between Insolvency and the Compliance functions taking collection actions help the IRS comply with the provisions of the automatic stay.

·         the Service must protect taxpayers' rights by avoiding actions in violation of the automatic stay

·         if a violation of the stay occurs, the IRS may be liable for damages and attorney’s fees, but not punitive damages

2.       Levy Issues. In general, the Service should release all levies immediately upon learning of the bankruptcy. Any funds levied upon, but not paid over, or property seized, but not yet sold, are property of the bankruptcy estate and should be turned over to the court. Insolvency should contact Counsel on a case-by-case basis, as necessary, when serious levy issues arise. See IRM 25.17.4.1.1, Levies and Bankruptcy.

3.       Adequate Protection. Although used infrequently in a Chapter 13 bankruptcy, in cases where levied funds are significant, or the property is easily liquidated or moved, adequate protection may be considered. Also, Insolvency may propose a request to lift the stay if a debtor’s ability to complete the plan is questionable. Insolvency should confer with Counsel on unusual situations of this nature.

Note:

A detailed discussion of adequate protection and cash collateral, more common in Chapter 11 proceedings than in Chapter 13, can be found in IRM 25.17.11.3.2 and 11.3.3.

25.17.13.4  (09-01-2004)
Pre-Confirmation Compliance Efforts

1.       In-Business Monitoring. In jurisdictions experiencing substantial delays prior to confirmation, Insolvency should monitor in-business taxpayers prior to confirmation. Business Master File (BMF) liabilities can be tracked systemically using TC 136. If the confirmation occurs very soon after the filing of Chapter 13 bankruptcy, the use of TC 136 may not be warranted. See IRM 25.17.11.3.6, Compliance Monitoring.

2.       Unfiled Returns. Unfiled returns constitute a recurring problem in Chapter 13 proceedings, impacting staffing and resources. The frequent need to resort to court actions and the prevalence of non-compliance by debtors is a costly burden to the government.

A.      Resolution Efforts. Local procedures should be developed, in coordination with Counsel, to reduce the number of unfiled returns.

B.      Outreach Efforts. Insolvency should use outreach efforts to help resolve this problem. Assistance and cooperation from the local bar association and the trustee can be enlisted emphasizing unfiled returns issues should be resolved prior to confirmation.

25.17.13.5  (09-01-2004)
The Chapter 13 Plan

1.       Time Limitations. In a Chapter 13 bankruptcy case, the plan may be filed concurrently with the petition. If this is not the case, the debtor must file a plan within 15 days of the petition date. Bankruptcy Rule 3015(b). Generally, required plan payments must begin within 30 days after filing of the plan. 11 U.S.C. §1326.

2.       Basic Plan Requirements. In general, the plan should specify what each creditor will be paid over the term of the bankruptcy, if interest will be paid and at what rate, and other conditions that affect the treatment of each creditor. If all plan requirements are met, the court must grant the debtor a discharge at the end of the Chapter 13 proceeding.

25.17.13.5.1  (09-01-2004)
Notice of Plan and Hearing

1.       Court Notification to Creditors. Bankruptcy Rule 3015 provides that the clerk of the court mail a copy of the plan or a summary of the plan to each creditor, along with the notice of the confirmation hearing. Bankruptcy Rule 2002(b) provides for 25 days notice to creditors of the hearing on confirmation.

Note:

An objection can be filed if a creditor receives less than 25 days notice.

25.17.13.5.2  (09-01-2004)
Plan Requirements

1.       Plan Provisions. 11 U.S.C. § 1322 explains required provisions of a Chapter 13 plan. An adequate Chapter 13 plan will:

A.      provide the trustee all, or a portion, of the debtor’s future earnings for the repayment of debts;

B.      provide for full payment of all priority claims under 11 U.S.C. § 507, unless the creditor agrees to a different treatment;

C.      provide all claims in the same class receive equal treatment; and

D.      pay creditors in installments for three years; or, if requested and with court approval, complete all payments within five years.

Caution:

Vague or ambiguous language in plans should be flagged for possible objections. Counsel's input should be sought if necessary.

2.       Additional Provisions. 11 U.S.C. § 1322(b) also sets forth permissive actions that may be incorporated in the plan, including:

A.      modifying the rights of secured creditors (for example, paying a secured creditor the amount of its claim in deferred payments instead of having the debtor surrender the collateral); and

B.      making provisions for certain postpetition claims.

3.       Plan Confirmation Conditions. 11 U.S.C. § 1325 gives conditions under which the court may confirm a plan. The court generally confirms a plan if:

A.      all provisions contained in the Bankruptcy Code are met and all fees are paid;

B.      the plan is proposed in good faith;

C.      unsecured creditors will receive at least the amount to which they would be entitled in a Chapter 7 bankruptcy;

D.      secured creditors will receive their collateral or the amount of their claim with interest, if paid in installments; and

E.      schedules indicate the debtor can make all plan payments.

4.       Commitment of All Disposable Income. Disposable income is the income remaining after necessary expenditures for family maintenance and business operations are deducted. If a plan provides for less than full payment of unsecured general claims, all of the debtor's projected disposable income must be committed to the plan payments.

Caution:

If the plan is deficient in this respect, Insolvency must consider if the deficiency will have a significant adverse effect on the IRS 's claim before it objects to the plan.

25.17.13.5.3  (09-01-2004)
Plan Review

1.       Timely Review of Plan. Insolvency should review Chapter 13 confirmation plans prior to the deadline for objections to ensure, if an objection is necessary, the referral will be made in time for the Service to be represented in bankruptcy court. Once the plan is confirmed, the provisions of the confirmed plan bind the IRS as a creditor, whether or not the plan provides for payment of the government’s proof of claim.

2.       Pre-Confirmation Trustee Plan Review. The Chapter 13 trustee must review plans and the claims that are filed prior to confirmation. The Service should file proofs of claim as soon as possible after a Chapter 13 petition is filed as confirmation hearings are held soon after the Section 341 meeting of creditors. IRM 25.17.13.5.4, Objecting to a Plan, and 25.17.13.5.5, Reasons to Object, provide information concerning trustee and plan objections.

3.       Service Goals. Insolvency management should develop local procedures which:

A.      emphasize review of all plans with large tax liabilities and/or unusual or significant case issues (see IRM 25.17.13.5.5.1, Large Dollar Case Reviews);

B.      minimize inappropriate treatment of IRS tax claims;

C.      are coordinated with Counsel; and

D.      communicate to the trustee and the bankruptcy bar, by use of local outreach efforts, the types of plans acceptable to the Service and those that will be opposed.

4.       " Provides for" – Plan Provision Problem. Frequently, Chapter 13 plans include a provision stating all priority debts under 11 U.S.C. § 507 will be paid in full. Some courts have held such a provision adequately "provides for" priority tax debts; consequently, they must be discharged under 11 U.S.C. § 1328(a), even if the plan does not actually provide for any payments on the tax debt.

5.       Timely Claims. Accordingly, the Service should file a claim prior to the bar date – or preferably by the confirmation date (should confirmation occur first) — whenever possible. This protects the government's interests by ensuring priority and other tax claims will be included and paid under the plan.

Note:

Timely filing of proofs of claim may require securing delinquent returns, or if returns are not received, filing an unassessed (estimated) proof of claim.

6.       Unacceptable Plan. If the plan does not provide for appropriate payment of the Service's claims, Insolvency should request an objection to confirmation. See IRM 25.17.13.5.4, Objecting to a Plan.

7.       The Chapter 13 Superdischarge. 11 U.S.C. § 1328(a) entitles a Chapter 13 debtor to a discharge after the debtor completes all payments due under the plan.

Caution:

No exceptions to discharge are codified for priority taxes as in Chapters 7 and 11. For this reason, a 11 U.S.C. § 1328(a) discharge is often called a superdischarge. Therefore, to protect the government's interests, plans must be examined as early as possible so an objection may be considered promptly.

25.17.13.5.4  (09-01-2004)
Objecting to a Plan

1.       Objection/Negotiations. When a plan is judged as inadequate, an objection must be considered. The objection may be raised by:

a.       Insolvency's negotiating acceptable terms with the debtor’s attorney prior to confirmation, thus avoiding potential litigation;

b.       objecting to the plan at the 11 U.S.C. § 341 meeting; or

c.       making a referral, requesting a formal objection be made to the plan.

2.       Referral System. Insolvency must have an efficient system in place for routing referrals, allowing for adequate control and timely actions through use of the AIS "referral" screen. Insolvency and Counsel should work together to coordinate such efforts. All referrals must include the debtor's TIN (s).

Reminder:

Referrals to local Counsel should address case-specific questions, not policy or procedural issues set forth by National Office.

3.       Insolvency Responsibilities. When an objection is in order, Insolvency should:

A.      refer to the local bankruptcy court rules controlling the case for timeframes to object;

B.      make prompt contact with the debtor's attorney to attempt informal resolution; and

C.      if appropriate, consult with Counsel on the proper method for a formal objection.

4.       Objection to Plan Factors. Dollar criteria, special circumstances, and local guidelines may be established to control the number of plan objections.

5.       Timely Objections. Once a decision is made to object to confirmation, the objection must be made timely to give the Service's legal representative adequate notice to prepare a quality objection to plan.

6.       Unfiled Returns. Filing an objection to confirmation is not always feasible. In cases involving delinquent returns, a referral seeking a motion to compel the debtor to file may be considered. In some Insolvency areas, trustees and the IRS have successfully coordinated efforts regarding the unfiled tax return(s) problem. For example, some trustees are filing motions to dismiss cases when the debtors do not comply with filing requirements.

7.       Outreach Efforts. Outreach to Insolvency stakeholders can be an integral part of the local Insolvency program. Personal interactions with trustees and bar association members should foster cooperation of all parties and address issues of mutual concern.

25.17.13.5.5  (09-01-2004)
Reasons to Object

1.       Protection of the Government's Interests. In many jurisdictions, the Chapter 13 trustee assures the court the plan meets the conditions listed under 11 U.S.C. § 1325. However, the trustee might not object to a plan that adversely affects an IRS claim. The IRS should object to a plan when appropriate to protect the government's interests while tax accounts are under the jurisdiction of the bankruptcy court. See IRM 25.17.13.6, After Confirmation.

2.       Ineligibility. One ground for filing an objection is "ineligibility. " A debtor may be ineligible for Chapter 13 relief for several reasons, but commonly the debtor's liabilities exceed the dollar limitations for a Chapter 13 proceeding. The following examples demonstrate cases ineligible for Chapter 13 filing.

A.      The total of the debtor's unsecured debt exceeds the limitation for unsecured debt in a Chapter 13 bankruptcy.

B.      The entity's name on the petition is a name of a partnership, which research confirms; but a partnership is not eligible to file Chapter 13.

C.      The debtor's occupation is listed in court filings as a stockbroker. A stockbroker is not eligible to file a Chapter 13 bankruptcy.

3.       Plan Concerns. Additional reasons the Service may object to confirmation include the following:

A.      the plan fails to meet the requirements of 11 U.S.C. §§ 1322 and 1325 (for example, priority and secured claims will not be paid in full);

B.      the debtor has not filed a required prepetition tax return – especially critical if a balance due is anticipated;

C.      the plan is not feasible given the debtor's current income, expenses, and future tax obligations;

D.      the plan proposes a balloon payment;

E.      the plan discriminates against the IRS by treating the Service's claims differently than other creditors in the same classification;

F.      the plan proposes payments outside of the plan;

G.     the plan proposes to abandon collateral to the government or proposes to distribute property in lieu of cash;

H.      the plan is to be modified by the debtor after confirmation; such a modification could impair the government’s claim; or

I.         the plan proposes less than full payment of all unsecured general tax claims and provides for less than all of the debtor’s disposable income, as defined in 11 U.S.C. § 1325(b), to fund the plan.

4.       Deficient Plans - Exceptions. In exceptional cases the Chapter 13 debtor may be unable to pay the IRS 's claims as required under the Bankruptcy Code, and it is in the taxpayer's and the government's best interests not to have the case converted or dismissed.

Example:

If a taxpayer files a Chapter 13 bankruptcy to prevent foreclosure on the family residence, and conversion to a Chapter 7 case will result in minimal or no payments toward the IRS 's priority, the best interests of the government and of the debtor may be to agree to partial payment of the priority tax claims under the plan of reorganization and specifically exempting such claims from discharge under the terms of the plan. When the bankruptcy is closed after completion of the plan, the taxpayer may submit an administrative OIC for the remaining tax liabilities.

5.       Unacceptable Deficient Plans. Under no circumstances will the IRS accept less than would be recoverable in a Chapter 7 case. Additionally, the IRS will not consider a plan providing payment of less than is statutorily required unless the following is true:

·         the plan does not provide for the payment of claims with lower priority than those of the IRS

·         all income not necessary for the health and welfare of the debtor's family or the production of income is committed to the plan

6.       Decision Factors for Evaluating Deficient Plans. The following considerations should be weighed before deciding to agree to treatment of the IRS 's claims that does not meet the requirements of the Bankruptcy Code:

·         debtor's ability to pay the IRS 's claim as required by the Bankruptcy code

·         debtor's compliance with filing requirements

·         probability the plan will pay the IRS more than if the case is dismissed or converted to a Chapter 7 liquidation

·         debtor's probable ability to continue making payments over the time remaining on the CSED

·         feasibility of the proposed plan of reorganization

·         existence of factors precluding the debtor from dismissing the bankruptcy and submitting an administrative offer in compromise

Example:

The IRS is the only creditor in the case.

·         dischargeability of the tax liabilities

·         agreement by other creditors with the same priority, such as state taxing authorities, to receive less than full payment of their claims

7.       Acceptance of Deficient Plans. If a debtor demonstrates agreeing to treatment different than is statutorily required under the Bankruptcy Code is in the government's best interest, the specific payment terms must be incorporated into the debtor's plan of reorganization and are subject to the approval of the bankruptcy court. The plan must also provide statements asserting:

 .        the Service has affirmatively agreed to treatment of its claim that differs from the treatment required under the Bankruptcy Code;

A.      the debtor will comply with all filing requirements and withholding and estimated tax payment requirements during the life of the plan; and

B.      the government's rights to collect upon a default in plan payments.

Note:

The AIS history must reflect the factors considered in the decision to accept treatment of the IRS 's claims irrespective of Bankruptcy Code requirements.

8.       Burden Falls to the Debtor. Unless the Chapter 13 debtor timely provides information to Insolvency demonstrating the inability to pay the IRS 's claim as required by the Bankruptcy Code and conversion or dismissal of the case is not in the best interest of the government, the case should be referred to Counsel to file an objection to the plan.

9.       Contents of Objection Referral. The referral to Counsel objecting to the plan must state the actions taken to resolve plan deficiencies with debtor's counsel. These may include:

·         the debtor did not demonstrate acceptance of a deficient plan is in the government's best interest

·         the debtor did not provide sufficient information to make such a determination

·         the debtor's payment proposal is not feasible

·         the tax claims are nondischargeable and full collection is likely outside of bankruptcy

25.17.13.5.5.1  (09-01-2004)
Large Dollar Case Reviews

1.       Periodic Large Dollar Reviews. All large dollar cases must initially be reviewed in depth in a timely fashion. Thereafter, periodic reviews of large dollar cases, according to local guidelines, should be a regular part of the Chapter 13 program. If a debtor exceeds the debt limitations for a Chapter 13 bankruptcy, the case can be dismissed or converted to another Chapter.

Reminder:

In a Chapter 13 superdischarge, the debtor receives a discharge of all debts provided for in the plan, even if they are not all full paid.

25.17.13.6  (09-01-2004)
After Confirmation

1.       Property of the Estate. 11 U.S.C. §1327 explains the effects of confirmation. All property of the estate vests in the debtor upon confirmation unless the plan or order confirming the plan provides for different treatment. Property that vests in the debtor is free of any debt provided for in the plan.

2.       Terms Binding. The IRS is bound by the terms of a confirmed plan even if it provides for less than full payment of its claims.

Reminder:

It is critical to object to the plan before confirmation when an objection is appropriate.

3.       Modifications. The IRS may be able to move for modification of the plan to obtain an increase in payment of its unsecured general claims when the debtor’s disposable income has increased.

25.17.13.6.1  (09-01-2004)
Modification of Plan

1.       Plan Modified. The plan may be modified after confirmation, but before full payment, to increase or reduce the amount of payments, to extend or reduce the time for such payments, or to alter the amount of the distribution to a creditor.

A.      Payments may not extend beyond three years after the date the first payment is remitted under the original confirmed plan, or beyond the extended five–year period as approved by the court.

B.      11 U.S.C. § 1329(a) provides the debtor, the trustee, or an unsecured creditor may request modification of a confirmed plan.

C.      Insolvency should scrutinize a plan modification as carefully as an original plan.

D.      If modification is not acceptable to the Service, a timely objection to the modified plan should be raised. Insolvency should consult Counsel for advice as necessary.

Caution:

In many jurisdictions, post-confirmation modifications will not be considered when an objection should have been raised prior to confirmation. Once confirmation has occurred, the court is less inclined to allow a change in the plan, unless some significant change has developed since confirmation. See IRM 25.17.13.8, Postpetition Tax Liabilities, and IRM 25.17.13.8.2, Section 1305 Claims.

25.17.13.6.2  (09-01-2004)
Impact of the Automatic Stay

1.       Duration of the Automatic Stay. The automatic stay is not lifted at confirmation in a Chapter 13 proceeding, but continues until the case is dismissed, discharged, or closed by the court. Therefore, contacting the debtor for demand of payment and collection of prepetition liabilities may be prohibited. See IRM 25.17.13.7, Monitoring the Chapter 13 Plan, and IRM 25.17.13.8, Postpetition Tax Liabilities.

Note:

The stay may be lifted to grant a creditor temporary relief from the stay.

2.       Postpetition Payments for Prepetition Taxes. Acceptance of postpetition payments in a Chapter 13 bankruptcy proceeding for prepetition taxes may violate the automatic stay. Thus, postpetition tax payments for prepetition taxes usually should be made through the Chapter 13 trustee. Insolvency may confer with Counsel if this matter arises.

3.       Prepetition Installment Agreement. Payments on a prepetition installment agreement generally should not be accepted from a Chapter 13 debtor after the debtor has filed for bankruptcy. Counsel may provide guidance, as needed.

4.       Debtor Spouse and Non-Debtor Spouse/Joint Return. To minimize chances of a violation of the Bankruptcy Code occurring, a TC 520 freeze code should be input on the jointly-filed balance due account even when only one of the spouses is in bankruptcy. See (5), CSED Indicators, below. However, Insolvency must address issues relating to debtor and non-debtor situations (for example, CSED concerns and community property issues). Counsel advice should be sought, as necessary.

5.       CSED Indicators. To identify if one or both spouses have filed bankruptcy (on a joint balance due return), indicators are input on the tax module following the TC 520. This information allows for proper Collection Statute Expiration Date (CSED) extensions and bankruptcy tolling in the event of multiple bankruptcies. The appropriate IMF CSED TIN Indicator, P, B, or S, must be input to identify which taxpayer, or both, is in bankruptcy.

·         " P " indicates the CSED applies to the primary taxpayer

·         " S " indicates the secondary taxpayer

·         " B " identifies both taxpayers as having filed bankruptcy jointly

6.       CSED Issues and Considerations. Periodic CSED monitoring of the non-debtor spouse must be conducted by Insolvency. See IRM 25.17.4.2(4)(c), CSED and Joint Assessments, and (d), CSED Indicator Codes.

A.      Insolvency may issue an Other Investigation (OI) to field Compliance to determine collection potential from the non-debtor spouse or to protect the CSED, if the collection statute is a concern.

B.      The delinquent account could be addressed in the debtor's plan.

C.      The non-debtor spouse may continue with a previously-approved payment agreement with the Service (if applicable).

D.      If the non-debtor spouse makes payments on the joint tax liability in addition to the debtor spouse making plan payments through the trustee, Insolvency must amend the Service's claim periodically to update the claim amount(s) for the court.

Note:

If a CSED is imminent or has passed, management must be informed.

7.       Decision to Retain Payment or Return Payment. A payment may be received by the Service from a source other than the trustee after the bankruptcy filing. If research indicates a balance due account on a joint liability, yet only one spouse is in bankruptcy, Insolvency should:

 .        determine who submitted the payment (the debtor or the non-debtor spouse?);

A.      try to determine the designation or intent of the payment to decide if IRS has a right to retain the funds; (for example, the funds may be from the non-debtor, who wants to continue with a prepetition installment or payroll agreement);

B.      take precautionary measures so the debtor's rights are not violated; and

C.      consult Counsel when legal advice is required.

8.       Field Contact With Insolvency. Field Compliance employees may not take any collection action after a taxpayer has filed Chapter 13 unless that action is cleared with Insolvency. Employees in field Compliance must contact Insolvency promptly after a taxpayer has filed a bankruptcy to determine if any information or advice is needed. If necessary, Insolvency will elevate complex or unusual situations to Counsel. See IRM 25.17.13.7(4), Postpetition Liabilities and Property of the Estate; IRM 25.17.13.7.1, Property of the Estate After Confirmation; and IRM 25.17.13.8, Postpetition Tax Liabilities.

Caution:

Collection must be stayed on any prepetition tax debt. Every effort must be made to ensure enforcement actions are not taken against the debtor (e.g., notice, lien, levy) while the debtor is under the protection of the bankruptcy court.

25.17.13.7  (09-01-2004)
Monitoring the Chapter 13 Plan

1.       Monitoring of Plans. To protect the government's interests, Insolvency management should have a monitoring program in place to determine if the debtor is adhering to the provisions of the plan after confirmation.

A.      AIS Plan Monitoring. In most jurisdictions, trustees provide their own plan payment monitoring systems to default Chapter 13 debtors who fail to make payments. However, Insolvency can, and should, use AIS to ensure quality plan monitoring and payment processing. The debtor's plan must be monitored to ensure all provisions are being met (e.g., the plan honors current tax obligations, or the debtor stays current with plan payments, etc.).

B.      Dismissal. With a severely non-compliant debtor, the Service may seek dismissal. See IRM 25.17.13.9, Court Intervention.

2.       Service Commitment. Insolvency should take a balanced approach to resolve post-confirmation non-compliance. Bankruptcy can provide a fresh start to the motivated debtor, and the Service is committed to helping in this effort within the context of the Bankruptcy Code. Bankruptcy can resolve the debtor's current financial problems and promote voluntary compliance with federal tax laws.

3.       Collection Actions Prohibited. Systemic notices and collection actions for prepetition taxes are not appropriate because confirmation in a Chapter 13 proceeding does not lift the automatic stay. See IRM 25.17.13.7.1(5), Allowed/Disallowed Post-Confirmation Actions.

Note:

One informational notice is allowed.

4.       Postpetition Liabilities and Property of the Estate. Collection of postpetition tax liabilities of a Chapter 13 debtor is complicated by a division among courts concerning what is considered "property of the estate" after confirmation. Some court cases have granted IRS the right to take collection action on postpetition debts in Chapter 13 proceedings when earnings or income used to fund the plan are not adversely impacted.

5.       Impact of Bankruptcy Estate Interpretations. After consultation with Counsel, as necessary, Insolvency must determine the most appropriate and effective actions to be taken regarding postpetition tax liabilities within the boundaries, if any, imposed by the court. The legal interpretation of the "bankruptcy estate" in a given area will determine the course of action taken by the Service.

6.       Imminent Plan Default. If a debtor has defaulted on payments or payments do not conform with plan provisions, Insolvency should contact the Chapter 13 trustee to question the reasons behind the default. The debtor should not be contacted concerning missed payments. If the problem appears to lie with the trustee's office and not with the debtor's failure to make timely payments, Counsel intervention may be required.

7.       Alternatives. After attempting to resolve plan problems and issues through the trustee, Insolvency, along with Counsel if appropriate, should determine if additional actions are required. These actions (initiated through Counsel) may include a request to modify the plan, a request for dismissal of the case, or an attempt to convert the case to a Chapter 7 proceeding. Decisions are made on a case-by-case basis.

8.       Conversion/Dismissal Considerations. If the debtor is not adhering to the plan, and the plan is not modified, Insolvency may consider conversion/dismissal motions, particularly in cases of egregious non-compliance. Counsel may be consulted on a "need to" basis before the formal referral is forwarded. The bankruptcy court is more likely to give favorable consideration to the Service's conversion/dismissal motion if made in the early stages of a bankruptcy, rather than toward the end.

25.17.13.7.1  (09-01-2004)
Property of the Estate after Confirmation

1.       Bankruptcy Code Guidelines. Insolvency should become familiar with three sections of the Bankruptcy Code affecting the determination of "property of the estate" after confirmation.

a.       11 U.S.C. § 541 . The property of the estate includes virtually all property in which the debtor has an interest at the time the petition is filed, including property in another's possession and community property.

b.       11 U.S.C. § 1306. Included in property of the estate is any property acquired after the petition date but before the case is closed, dismissed, or converted, including wages and other income.

c.       11 U.S.C. § 1327 . Assets revest in the debtor at confirmation, unless otherwise specified in the plan or confirmation order.

2.       Service Position – Property of the Estate in a Chapter 13 Proceeding. The Service's position, generally, is after confirmation, the bankruptcy estate is limited to the portion of the debtor's income or other earnings necessary to fund the plan.

A.      Case law reflects various other positions on this issue, including both the position that all of the debtor's property remains in the estate post-confirmation and the position that only property acquired post-confirmation remains in the estate.

B.      The plan can provide that property remains in the estate.

C.      Counsel's advice should be sought when clarification is required on this subject.

3.       Community Property. In community property states, property of the estate includes postpetition community property acquired by the non-debtor spouse. IRM 25.17.3.4.1.1, Community Property, provides additional information on this topic.

4.       No Separate Taxable Entity in a Chapter 13. Although the bankruptcy estate is a separate taxable entity upon the filing of petitions by individuals under Chapters 7 and 11, no separate taxable entity exists in a Chapter 13 case. See I.R.C. §§1398 and 1399. As a result, separate tax returns (Form 1041) are not filed for Chapter 13 estates.

5.       Allowed/Disallowed Post-Confirmation Actions. After confirmation, the Service can generally file tax liens to collect postpetition taxes. To avoid litigation on the issue of whether filing tax liens for postpetition taxes violates the automatic stay, the notice of federal tax lien should include an annotation stating, "This Notice of Federal Tax Lien is not being filed with respect to property while it remains property of the bankruptcy estate of the taxpayer." In some jurisdictions, the Service can administratively seize real estate or tangible property to collect post petition liabilities, but cannot take collection against property committed to the plan or needed by the debtor to make payments to the trustee. Wage levies should exclude the amount needed to fund the monthly plan.

Caution:

The Service must be wary of taking collection actions that interfere with funding the Chapter 13 plan. Even if assets are not property of the estate, collection may impair the debtor's ability to fund the plan (for example, seizure of a debtor's business) and may be prohibited by the bankruptcy court.

6.       When Property Remains Property of the Estate.

 .        Local Law. Where local law provides all property remains property of the estate after confirmation, no collection action for postpetition taxes is permitted unless relief is obtained from the automatic stay.

A.      Plan Provision. If the debtor's plan provides all property remains property of the estate after confirmation, no collection action may be taken against such property. Any notices of federal tax lien filed with respect to postpetition liabilities should include an annotation the lien does not attach to property of the estate. See paragraph (5), above.

7.       Seek Counsel Advice. In any collection action contemplated against a Chapter 13 debtor (or any debtor in a bankruptcy), Insolvency should seek the advice of local Counsel prior to taking distraint action . The debtor is under the protection of the bankruptcy court, and the debtor's rights must be protected.

25.17.13.8  (09-01-2004)
Postpetition Tax Liabilities

1.       Postpetition Tax Liabilities. Taxes incurred after the date of the bankruptcy filing are generally considered to be postpetition tax liabilities. The Service's position is the accrual date , not the date of the assessment nor the date the tax was payable, determines whether an account is considered a pre– or a post– petition liability.

Example:

A 2003 income tax (balance due) return has a year ending of December 31, 2003 . Taxpayer filed bankruptcy on December 30, 2003 . The tax was assessed on April 30, 2004 . The resulting balance due account is considered a postpetition tax liability.

2.       Factors and Considerations. Postpetition tax liabilities are handled in various ways by the Compliance units in the territories (e.g., Campuses and Insolvency units). In all cases, however, the local Insolvency unit should be contacted to ensure the appropriateness of actions contemplated against debtors in bankruptcy.

3.       Important Considerations. The Service can deal with postpetition tax liabilities in several ways, and in determining which option to exercise, Insolvency must consider:

A.      if the automatic stay is in effect, and if the CSED is tolled or running;

B.      the amount owed;

C.      the debtor's ability to pay;

D.      the debtor's past compliance history; and

E.      if the plan is just beginning or has progressed to later stages.

4.       Local Level Considerations. At the local level, various factors play a role in determining how Insolvency handles postpetition liabilities. Factors for Insolvency to consider are:

A.      local Insolvency staffing and resources;

B.      local field Compliance staffing and resources;

C.      Counsel's staffing, resources, and recommendations;

D.      the level of cooperation with the trustees and the local bar association in the area;

E.      the commitment, activity, and success of local outreach efforts;

F.      established procedures and guidelines among the various Service functions and their effectiveness ; and

G.     the existence of any local rules/agreements and standing orders.

5.       Approaches. Insolvency units may use various approaches when dealing with postpetition tax liabilities, including these options:

·         filing 11 U.S.C. §1305 claims (requires a motion to modify plan) — see (7) below and also IRM 25.17.13.8.2, Section 1305 Claims

·         sending OIs to ROs for investigatory and possible collection actions (may require lifting of stay)

·         referrals for Substitute for Returns (SFRs) — actions to complete may be prolonged

·         filing a motion to lift the automatic stay — requires court intervention

·         preparation of 6020(b) returns —a time-consuming process

·         referrals for motions to convert or dismiss — determined on a case-by-case basis (e.g., conversion due to ineligibility for Chapter 13 or dismissal due to continual non-compliance)

·         assertive actions by trustees — some trustees will initiate dismissal actions when debtors are accruing postpetition liabilities

·         administrative collection against exempt property or property not used to fund the plan (collection from specific assets)

·         exploring alternatives with debtor prior to distraint action(s)

·         installment agreement

·         modification of plan

Caution:

If the debtor refuses to modify the plan or is negligent in doing so, the Chapter 13 trustee may pursue modification in the bankruptcy court. The IRS also has the right to file such a motion, if necessary. But, once confirmation has taken place, creditors have minimal success with such a request.

·         pursuing collection from the non-debtor spouse in a joint income tax return filing (except in community property states where this is disallowed. See IRM 25.17.3.4.1.1, Community Property)

·         local outreach efforts with the courts, trustees, and local bar associations

·         waiting to pursue administrative collection outside of bankruptcy

Note:

Some of these options may not be available in some jurisdictions.

6.       Payments Made Outside the Plan. The IRS may make arrangements with the debtor to have the postpetition liabilities paid outside the plan, but such an arrangement (an installment agreement), is generally not in the best interests of the government.

 .        Such an arrangement is solely between the debtor and the IRS .

A.      If an installment agreement is entered into, the trustee will not oversee these payments.

B.      The Service should generally discourage this option since default on plan payments allows the Service to move to convert or dismiss. Those remedies are not available in side-agreements.

C.      Also, if additional funds are available, the debtor should use them to pay unsecured general claims; the debtor is expected to dedicate all disposable income to fund the plan per provisions of the Bankruptcy Code.

7.       Payment through the Trustee. Insolvency may request payment of postpetition debt through the court by filing a 11 U.S.C. §1305 claim. Although §1305 claims may be accepted as filed, they are not always paid. Some debtors fail to modify the plan to include the postpetition liabilities, complicating the discharge process. In addition, CSED concerns can be created for the Service with the filing of 11 U.S.C. § 1305 claims. Refer to IRM 25.17.13.8.2, Section 1305 Claims.

8.       Property of the Estate — Legal Interpretations. Collection of postpetition tax liabilities of a Chapter 13 debtor is complicated by a division among the courts defining "property of the estate" after confirmation. However, some courts have allowed the IRS the right to take collection action on postpetition debts in Chapter 13 proceedings provided earnings or income used to fund the plan are not adversely impacted. Insolvency should contact local Counsel to determine the acceptable actions to take on postpetition tax liabilities for their inventory.

9.       CNC Accounts – 53d. A tax account may be put in a Currently Not Collectible ( CNC ) "53" status (completed by use of Form 53) only under strict IRM CNC guidelines. In a Chapter 13 bankruptcy, with a joint return balance-due situation, and only one of the spouses in bankruptcy, a "53" of a joint account, or any portion of the account, would not be appropriate during the pendency of the bankruptcy of the debtor spouse while the debtor is under the court's jurisdiction.

Note:

The Service is not prohibited from pursuing collection from a non-petitioning spouse. See IRM 25.17.14. 6.1, Joint Account and Non-Debtor Spouse.

10.   Post-Discharge Administrative Collection. The Service may choose to do nothing to collect the postpetition tax debt(s) until the Chapter 13 debtor receives a discharge. The Service may then attempt to collect the tax administratively. Postpetition taxes will not be discharged, unless provided for in the plan.

 .        The debtor is disadvantaged if the IRS waits until discharge to collect postpetition liabilities because the liabilities continue to accrue interest and penalties during the bankruptcy.

A.      The debtor may be in a better financial position after discharge to pay the taxes due, but the reverse could be true as well.

B.      Serious collection statute complications and issues may arise.

Caution:

The CSED may not be tolled by the bankruptcy since the automatic stay does not absolutely prohibit the collection of postpetition liabilities not provided for in the plan. Counsel can provide guidance.

11.   Discharge Provisions of 11 U.S.C. § 1328(a). Only prepetition claims provided for by the plan, which have been filed and allowed or disallowed, and postpetition 11 U.S.C. § 1305 claims provided for by the plan, are discharged by § 1328(a).

25.17.13.8.1  (09-01-2004)
Collection from Specific Assets

1.       Other Investigations. Insolvency has the option to request an Other Investigation (OI) from field Compliance employees when property, not specifically retained in the estate, is available to effect collection.

Example:

The Service may consider issuing an Ol for distraint action, with Counsel guidance and concurrence, after alternatives have been considered. If a levy/seizure is to be done, lifting of the automatic stay may be required.

2.       Benefits of Distraint Action:

·         outstanding postpetition tax debts can be collected after confirmation and applied towards the taxpayer's tax debt(s) to reduce taxpayer burden

·         stay violations can be minimized by taking collection action against targeted property which is not property of the estate

·         future tax compliance can be promoted and encouraged by the deterrent effect of distraint actions

3.       Risks of Distraint Action:

·         generally, few assets merit collection activity in a typical Chapter 13 case

·         analyses can be time-consuming

·         Insolvency may need to review each plan and confirmation order to ensure specific property was not retained (a resource problem)

·         collection actions that may prevent the debtor from completing the plan may still be challenged (for example, a seizure of the debtor's business may be challenged in court because it has an adverse effect on completion of the confirmed plan)

·         Compliance personnel, unfamiliar with the bankruptcy case or provisions of the Bankruptcy Code, may violate the stay by making a demand for payment of prepetition taxes or by applying payments to prepetition tax liabilities instead of to postpetition debts

·         a lifting of the stay, requiring court approval, may still have to be requested to avoid any legal repercussions

25.17.13.8.2  (09-01-2004)
Section 1305 Claims

1.       Postpetition Tax liabilities — 11 U.S.C. § 1305. Chapter 13 specifically provides for postpetition debt in 11 U.S.C. §1305. This section of the Bankruptcy Code allows tax liabilities becoming payable while the case is pending to be claimed in Chapter 13 cases. (Most other postpetition creditors in a Chapter 13 bankruptcy cannot file a claim in the bankruptcy proceeding.)

2.       Who Can File . Under 11 U.S.C. § 1305 only tax claimants (for example, the IRS ) and consumer debt creditors, whose debt is necessary to the Chapter 13 plan, have the authority to file a claim under § 1305 procedures.

3.       Classification. A 11 U.S.C. §1305 claim is treated as a prepetition priority claim.

4.       Not " Admin" Claim. Claims for postpetition taxes should not be filed as administrative claims because the Service views postpetition taxes as constituting a liability of the debtor, rather than the estate.

5.       Interest and Penalties. Interest and penalties are not usually claimed on § 1305 claims. However, local practice varies.

6.       Bar Date. § 1305 claims have no bar date, but local procedures may set time limitations.

7.       Form to Use. Counsel's assistance may be needed to determine the correct form to use in a particular Insolvency area. However, Form B10, Proof of Claim, and Form 10 Attachment usually may be used for this purpose.

8.       Statement on Claim. A statement should be entered on each § 1305 claim to identify for the court the type of claim being filed.

Example:

" THIS CLAIM IS BEING FILED UNDER THE AUTHORITY OF TITLE 11 U.S.C. SECTION 1305. "

9.       Local Rules. Insolvency employees must understand local rules/agreements or standing orders affecting the treatment of postpetition tax liabilities in their area.

10.   Benefits of Filing Section 1305 Claims:

·         the possibility of violating the stay is lessened

·         collection is achieved through the trustee

·         monitoring of payments can be done systemically, using AIS

·         full compliance may be achieved

·         future tax compliance may be promoted

·         the Service will be paid as a priority creditor

·         tax delinquencies may not "follow " the taxpayer out of bankruptcy to be collected post-discharge

·         the debtor is provided with a more thorough "fresh start"

11.   Risks of Filing Section 1305 Claims:

·         in most jurisdictions, the plan must be modified to provide for the additional claim – some debtors fail to do this, complicating the discharge determination process

·         once provided for in the plan, the tax liability may be dischargeable

·         plan modification may lower the amount the Service's prepetition unsecured claims receive

·         the Service may receive little or nothing for interest and penalties

·         the trustee may not pay § 1305 claims, because generally they are filed after plan confirmation, and funds may not be available to pay postpetition debts

·         § 1305 claims require monitoring by Insolvency

·         due to the high number of Chapter 13 cases and the high rate of postpetition noncompliance, Insolvency's work resources can become over-extended

·         serious CSED issues may arise, generally resulting in Counsel involvement

12.   Filing of a § 1305 Claim. Insolvency management sets local policy on filing § 1305 claims based on economic feasibility. If they are filed, § 1305 claims should be monitored to track their effectiveness in collecting postpetition tax liabilities.

Caution:

Even though a § 1305 claim is technically allowed by the court, it does not necessarily follow the IRS will receive payment(s) on its claim.

13.   Modification of Plan Based on a 11 U.S.C. § 1305 Claim. The debtor should file a motion to modify the plan to include the 11 U.S.C. §1305 claim. It is generally beneficial for the Service to send a written request to the debtor to advise of the need for a modification of the plan so the Service can file a § 1305 claim. A copy should be sent to the debtor's attorney.

Reminder:

In some areas, the Chapter 13 trustee may request the debtor to modify the plan to include postpetition tax liabilities. The trustee, as well as the IRS , can file a motion to modify the plan. Per 11 U.S.C. § 1329, an unsecured creditor has the right to seek modification of the plan.

14.   Discharge under 11 U.S.C. § 1305. If a claim is filed under § 1305 and the debtor provides for the postpetition tax claim by modifying the plan, upon completion of the Chapter 13 plan, the debtor will receive a discharge of these taxes under 11 U.S.C. § 1328(a). Only through completing a Chapter 13 plan and receiving a discharge under 11 U.S.C. §1328(a) will the debtor obtain relief for these postpetition taxes.

15.   Collection Alternatives. The IRS does not have to file such a claim, and the debtor cannot file a 11 U.S.C. §1305 claim on behalf of the IRS . The IRS has the option of waiting until discharge or dismissal to collect postpetition taxes. If the IRS chooses not to file a claim under § 1305, it may use any non-bankruptcy rights it has to collect the taxes owed, unless such measures are specifically not allowed in a certain judicial area.

Caution:

Measures taken should not affect the funds the debtor has available to pay the prepetition tax debts provided for in the Chapter 13 plan. The Service may need to obtain relief from the automatic stay. Insolvency must consult with Counsel when this situation arises.

25.17.13.9  (09-01-2004)
Court Intervention

1.       Motions Before the Court. In cases of serious postpetition non-compliance, court intervention may be an appropriate solution. Some of the court options the Service may consider include:

A.      a motion to convert the case to a Chapter 7 proceeding;

B.      a motion to dismiss the case; or

C.      a motion to lift the automatic stay (to allow distraint action).

Note:

For the benefit of all parties, litigation should become an option only after all alternatives have been explored.

2.       Counsel Coordination. Coordination with Counsel must be maintained since the volume of non-compliant debtors might overwhelm Counsel's ability to file motions and to argue and resolve issues.

3.       Benefits of Court Intervention:

·         possible positive influence on the debtor's tax compliance, present and future

·         debtor's ability to remain in bankruptcy longer, improving the debtor's overall finances and opportunity for a fresh start

·         prohibition of a bankruptcy filing for 180 days after the debtor requests dismissal subsequent to a motion to lift the stay. 11 U.S.C. § 109(g)(2)

·         seeking relief through court action may be the only means, not in violation of the automatic stay, to address a debtor's non-compliance

·         avoidance of damages against the Service due to the stay's being lifted

4.       Risks of Court Intervention:

·         may be expensive for the government

·         is time consuming for all parties concerned

·         may increase tax non-compliance due to delay (e.g., pyramiding of taxes could continue)

·         can delay collection actions due to pending legal action

Note:

Courts may be unwilling to grant such requests, at which point the Service's options are limited.

5.       Protection of the Government's Interests. In some cases, after a court motion is filed, modification of the plan to pay a postpetition claim may be an acceptable resolution. In this event, to protect the government's interests, the IRS should secure (as applicable):

 .        a provision requiring future compliance (for example, filing of required tax returns);

a.       a provision requiring a lifting of the stay to collect any future liabilities;

b.       a provision requiring proofs of deposit and/or estimated tax payments; and/or

c.       a modification of the plan that does not have an adverse impact on the prepetition claims.

25.17.13.9.1  (09-01-2004)
Conversion

1.       Conversion to Another Chapter. A debtor may convert from Chapter 13 to another chapter as long as the debtor is eligible to file under that chapter.

2.       Legal Requirement. A court order is not required for a voluntary conversion from Chapter 13 to Chapter 7. The debtor is required only to file a notice of conversion.

Note:

The filing date of the notice is deemed to be the date of conversion to Chapter 7.

3.       Creditor Election. A creditor may also seek a conversion for cause, though not often done in Chapter 13.

25.17.13.9.2  (09-01-2004)
Dismissal

1.       Revert to Pre-Bankruptcy Status. A number of Chapter 13 debtors fail to complete their plans. Upon dismissal, the stay of actions against property of the estate terminates, and the tax accounts revert to pre-bankruptcy status.

2.       Dismissal Requests by Debtor. The dismissal may be at the debtor's request. Should a debtor request a dismissal, the court will generally grant the dismissal unless the case was converted from another chapter. The IRS ordinarily concurs in this request. However, in rare instances, the IRS may object to protect the government's interests.

Example:

The debtor may seek to avoid the court's authority in resolution of a levy dispute and wants to be outside of the bankruptcy court's jurisdiction. However, the Service, if it has a strong case, may prefer the debtor remain in bankruptcy so the court will have the authority to make a ruling on disbursement of the levy funds.

3.       Dismissal Request by Trustee. The Chapter 13 dismissal is often sought by the trustee because the debtor is delinquent with plan payments, or has compliance issues, such as unfiled tax returns.

4.       Dismissal Request by Creditor. A creditor has the right to request the case be dismissed for cause. For the Service, cause can include pyramiding of taxes, unfiled returns, sporadic or chronically late payments, or no payments.

·         Pyramiding — pyramiding of tax liabilities, a recurring problem in Chapter 13 bankruptcies, is a common reason the Service seeks a dismissal

·         Monitoring — Insolvency should periodically monitor the case, per guidelines established by local management, to detect plan deficiencies, including allowance of pyramiding of personal and business taxes

·         11 U.S.C. §1307 lists some of the bases for requesting dismissal in Chapter 13 bankruptcies

5.       Importance of Early Motion. If the pursuit of a conversion/dismissal motion is appropriate, the Service should make the motion as early as possible in the Chapter 13 bankruptcy process.

6.       Termination of Stay of Actions. Upon dismissal:

·         the stay of actions against property of the estate terminates

·         the trustee usually returns all Chapter 13 payments, not previously distributed to creditors, to the debtor, minus trustee expenses

·         if a controversy ensues over entitlement to property after dismissal, the court has jurisdiction to resolve the issue

25.17.13.10  (09-01-2004)
The Chapter 13 Discharge

1.       Two Types. 11 U.S.C. §1328 provides a discharge may be granted in one of two ways to a Chapter 13 debtor:

a.       Superdischarge. When all plan payments are completed, the debtor receives a "superdischarge. "

b.       Hardship Discharge. Exigent circumstances may force the debtor to request a "hardship discharge" when the plan cannot be completed.

25.17.13.10.1  (09-01-2004)
Superdischarge

1.       Plan Completion. Under 11 U.S.C. § 1328(a), the court grants the debtor a superdischarge upon completion of all plan provisions.

2.       Exceptions. The debtor is discharged of all debts provided for by the plan or disallowed under 11 U.S.C. § 502, except :

A.      any long-term debt (such as mortgage) provided for under the plan, the last payment of which is not due until after completion of the plan (11 U.S.C. § 1328(a)(1));

B.      debts for alimony, maintenance, or support that are non-dischargeable under 11 U.S.C. § 523(a)(5);

C.      student loans that are non-dischargeable under 11 U.S.C. § 523(a)(8);

D.      drunk–driving related debts that are non-dischargeable under 11 U.S.C. § 523(a)(9); and

E.      amounts constituting restitution or fines included in a sentence on the debtor's conviction of a crime. 11 U.S.C. § 1328(a)(3).

3.       Tax Debts Discharged. Generally, when a superdischarge is granted, all tax debts "provided for" in the plan, as well as any disallowed tax claims (for example, untimely filed claims), are discharged.

A.      The IRS is bound by the terms of the plan even when it will not receive full payment under the plan.

B.      The best corrective action is to object to confirmation, whenever possible.

C.      Plans should be reviewed prior to confirmation so a timely objection may be filed if the plan does not provide for all tax claims as required by the Bankruptcy Code.

4.       Timeframe for Closing Actions. All actions to close a case must begin within 30 calendar days after receipt of a discharge order.

5.       " Provided for" but No Payments. Situations arise when a liability is considered by the court to be " provided for" in the plan, but no payments are received because a claim was not filed. This may result from Service delay or for other reasons.

Example:

(a) TFRP. A prepetition Trust Fund Recovery Penalty (TFRP) may not have been determined until the bar date for filing a claim has passed. Although the IRS was given notice, the Service did not file a timely unassessed (estimated) claim. Even though unpaid, the liability will most likely be discharged under the superdischarge provisions of 11 U.S.C. § 1328(a).

Example:

(b) Inadequate Plan – Minimal Payments. IRS was given timely notice of the bankruptcy, but the plan provided for only minimal payments of the Service's claim. At discharge the bulk of the tax debt remains unpaid. The IRS is bound by the terms of the confirmed plan, because the Service did not file an objection to confirmation. Usually, these taxes are discharged.

6.       Lack of Notice to the IRS . If the Service is not provided proper notice of a bankruptcy filing, as required in the Bankruptcy Code, the prepetition taxes generally are not discharged.

7.       Adjustment Actions. Once a discharge has been granted under 11 U.S.C. § 1328(a) and taxes are deemed to be dischargeable, appropriate adjustments must be made to the remaining balance due accounts "provided for" in the plan. See IRM 25.17.14.15, Adjustment Methods for Dischargeable Liabilities.

8.       Counsel Consultation. If significant, complex discharge issues and questions arise concerning tax liabilities after a debtor has received an order of discharge, Insolvency should confer with Counsel, as necessary.

Reminder:

Once the discharge has been granted, the Service's options are limited.

9.       Vacating an Order of Discharge. One option the Service may use, available only to creditors, is taken infrequently. The court can vacate an order of discharge when the Service was not paid as required in the plan, and the discharge order was based on the mistaken assumption that the IRS was paid. Cisneros v. United States , 1994 F.2d 1462 (9th Cir. 1993).

10.   Limited Collection Option from Exempt Assets in a Chapter 13. A discharge of debt in bankruptcy relieves the debtor of personal liability for the debt. However, the debt may still be collected from property encumbered by a pre-bankruptcy tax lien. A lien filed prepetition, and which is still valid, preserves the government's right to proceed against exempt property, even if the underlying tax liability is discharged. See 11 U.S.C. § 522(c)(2)(B).

Note:

This collection method is rarely used in a Chapter 13 bankruptcy case. If this situation presents itself for serious consideration, Insolvency must confer with Counsel for advice. See IRM 25.17.4.1.2, Exempt and Abandoned Property.

25.17.13.10.2  (09-01-2004)
Hardship Discharge

1.       Hardship Discharge. The debtor may request a hardship discharge under 11 U.S.C. § 1328(b). Circumstances beyond the debtor's control may prevent the debtor from completing the plan, and rather than seeking a dismissal of the bankruptcy, the debtor may apply for a hardship discharge.

2.       Criteria. Generally, when seeking a hardship discharge, the debtor must prove three things to the court:

a.       the circumstances leading up to the request for a hardship discharge were beyond the debtor’s control (for example, loss of a job);

b.       the value of property actually distributed is at least what would have been distributed in a Chapter 7 proceeding; and

c.       a modification of the plan is not feasible.

3.       Notice and Hearing/Objection. The debtor’s request for a hardship discharge requires notice and hearing. The IRS may choose, in rare cases, to object to the discharge if one of the conditions for discharge is not met.

4.       Chapter 7 Equivalency. A hardship discharge is equivalent to the discharge granted in a Chapter 7 proceeding. IRM 25.17.7.19,Discharge, provides further information on Chapter 7 discharges. 11 U.S.C. § 523, enumerates exceptions to discharge.

Note:

Generally, under 11 U.S.C. § 1328(b), in a hardship discharge, all priority taxes, unfiled returns, fraudulent returns, and certain late-filed returns are not discharged.

25.17.13.10.3  (09-01-2004)
Revocation of Discharge Due to Fraud

1.       Time Limitation. If, within one year of the granting of the discharge, a determination can be made the debtor obtained the discharge through fraud, the court, after notice and hearing, can revoke the discharge. 11 U.S.C. §1330.

25.17.13.11  (09-01-2004)
Distribution of Funds

1.       Application of Payments. Generally, all funds received from the trustee are posted to AIS using the payment plan monitoring screen. Unless designated differently by the court, payments are applied to allowed claims, by category, as follows:

a.       secured claims – each secured period is paid in full, then payment is applied to accrued interest on that module before payments are applied to the next oldest module;

b.       priority claims – only the tax and interest are paid;

c.       unsecured claims – only the tax and interest are paid;

d.       penalties on priority claims; and, lastly,

e.       penalties on unsecured general claims .

2.       Non-Plan Payments. Occasionally non-plan payments are received by the Service on a bankruptcy case that are not remitted through the Chapter 13 trustee. Insolvency must document all particulars surrounding receipt of such payments. If payments are retained, AIS should be updated to indicate a payment received outside the plan to reflect an accurate balance amount.

3.       Payment Screening. Insolvency should screen such a payment to determine if the Service is entitled to apply the payment as a credit to the debtor's federal tax account.

A.      If Insolvency determines a payment should not be credited, timely actions must be taken to dispose of the funds appropriately.

B.      If a payment has been received and deposited by the Service, and determination is made later the payment should be returned, Insolvency will initiate actions to generate a refund – either to the Chapter 13 trustee or to the debtor, per local procedures.

4.       Proper Screening/Allowance of Payments. Examples of payments that may be credited to the taxpayer's account and generally allowed to be credited to the debtor's account after proper screening is done by Insolvency (e.g., research conducted, advice obtained from Counsel, concurrence from trustee, if appropriate), are as follows:

·         a voluntary payment from the debtor or co-debtor

·         a payment received from the sale of property

·         a payment received from a lien discharge

·         a payment from a non-petitioning spouse on a joint return

5.       Clarify Claim/Amend or Withdraw. If such a payment is received, and the Service determines it is entitled to retain the payment, Insolvency will amend (or withdraw) the proof of claim, as applicable. This is necessary for claim clarification purposes.

Note:

IRM 25.17.10, Payments in Bankruptcy; IRM 25.17.13.6.2, Impact of the Automatic Stay; IRM 25.17.13.6.2 (2), Postpetition Payments for Prepetition Tax; and IRM 25.17.13.6.2 (3), Prepetition Installment Agreement, provide additional information.

 

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