Category Archives: Lien Stripping

Are IRS Tax Liens Removed by Filing Bankruptcy?

An IRS lien can be eliminated in a Chapter 13 bankruptcy case, but tax liens cannot be avoided by filing a Chapter 7 bankruptcy case.

A taxpayer unsuccessfully attempted to avoid the IRS’ tax liens by filing chapter 7.  In U.S. v Parker, 578 Fed.Appx. 669 (9th Cir. 2014), the court found that a chapter 7 case discharged the taxpayer of personal liability for old taxes, but the prepetition tax liens on the taxpayer’s property remained enforceable after the discharge—citing the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992).

Practice Pointers: A Chapter 7 bankruptcy case is designed to eliminate personal liability, but not the lien against real estate or personal property.  A chapter 13 case would be a better strategy if the goal is to strip or avoid a lien.

For follow-up questions, contact attorney Robert V. Schaller by clicking here.

What is the Effect of an IRS Lien During Bankruptcy?

This issue was addressed in In re Nomellini, 534 B.R. 166 (Bankr. N.D.CA 2015).  In Nomellini, a taxpayer filed a chapter 13 bankruptcy and listed the value of his allegedly underwater real property at $950,000 with a mortgage lien of $980,000. Taxpayer also listed personal property of $10,000.  The IRS accepted the valuations and filed a proof of claim consisting of a $10,000 secured claim and a $204,000 unsecured claim.  The chapter 13 plan stated that the “valuations shown above will be binding unless a timely objection to confirmation is filed.”  No objections were filed and the plan was confirmed.  The IRS ultimately was paid $10,000 for the secured claim.

Later, but before the plan was completed and discharge entered, the taxpayer sold the home for $2,175,000, which resulted in a $1,000,000 surplus after the mortgage obligation was paid in full.  The taxpayer argued that the IRS was only entitled to the $10,000 provided in the plan and that the IRS was limited by the confirmed plan and did not enjoy the rights of its lien.

The court phrased the issue as whether, under the provisions of the confirmed plan, the IRS was entitled to any of the proceeds of the sale of taxpayer’s real property based on the federal tax lien recorded, when the IRS has already been paid the full amount of its allowed secured claim as set forth in the confirmed plan.

The Nomellini court rejected the taxpayer’s argument believing the confirmed plan only affected the IRS’ “claim” against taxpayer and did not affect the IRS’ in rem rights established by the tax lien.  The court held that the IRS’ lien was not affected by the plan confirmation and the IRS had a valid lien against the property at the time of the sale because taxpayer never stripped or modified the IRS lien.

Practice Pointers: Taxpayer should have been more strategic.  Taxpayer should have filed a Rule 3012 motion to value the real estate soon after filing bankruptcy.  The IRS apparently would have agreed with the taxpayer’s valuation of the real estate.  Alternatively, taxpayer could have filed an adversary proceeding against the IRS and sought a valuation within the adversary and an order declaring the lien void upon issuance of the discharge.  Then, taxpayer should have paid off the case and received the discharge prior to selling the property.  Upon discharge, the IRS’ lien would have been void because the underlying debt would have been discharged. Thereafter, taxpayer could have sold the real property and kept the $1,000,000 surplus and paid nothing more to the IRS.

For follow-up questions, contact attorney Robert V. Schaller by clicking here.

Can an IRS Tax Lien be Eliminated or Reduced by Filing Bankruptcy?

The IRS has the statutory right to record a Notice of Federal Tax Lien against a taxpayer’s home, other real estate, and personal property.  See 26 U.S.C. §6323. Such a lien provides the IRS with the right to a taxpayer’s assets superior to any later recorded junior liens.  In the event of liquidation, the IRS would be paid in full prior to any junior lienholders receiving any money.

A taxpayer attempted to eliminate/void the IRS’ lien by filing Chapter 13 bankruptcy in Ryan v. United States, 725 F.3d 623 (7th Cir. 2013).  In Ryan, taxpayer failed to file taxes for the years 2006 thru 2010.  The IRS responded by filing a Notice of Federal Tax Lien against taxpayer’s real property and personal property. Subsequently, taxpayer lost his home for delinquent real estate taxes and did not own a bank account or vehicle when he filed bankruptcy.  In fact, debtor’s total assets were worth only $1,625 as of the bankruptcy filing date.

Taxpayer attempted to reduce the tax lien to the asset value of $1,625.  Taxpayer alleged that §506(a) allows a taxpayer to bifurcate the IRS’ claim between a secured claim component to the extent of any assets and an unsecured claim component for the remaining debt.  Then, taxpayer asserted that §506(d) of the Bankruptcy Code allowed a taxpayer to “stripdown” the lien to the value of the property, citing 11 U.S.C. §506(d).  The IRS agreed with the bifurcation, but objected to the lien being voided and argued that §506(d) does not authorize the bankruptcy court to void the federal tax lien to the extend it exceeded the value of the assets.

The Ryan court looked for guidance in the U.S. Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992).  In Dewsnup, the Supreme Court considered the proper interpretation of §506, and held that §§506(a) and 506(d) did not have to be read together, and that the term “allowed secured claim” in §506(d) was not defined by reference to §506(a). Instead, the Court determined that, consistent with preCode rules that liens pass through bankruptcy unaffected, the term “allowed secured claim” in §506(d) means a claim that is, first, allowed under §502 and, second, secured by a lien enforceable under state law, without regard to whether that claim would have been deemed secured or unsecured under §506(a).

Therefore, the Ryan court found that the IRS’ claim was secured by a lien enforceable under state law, and then held that the IRS’ claim could NOT be stripped down pursuant to §506(d). However, the Ryan court noted in dicta that the IRS’ claim could be stripped down pursuant to other sections of the Bankruptcy Code, including 11 U.S.C. §1325.

For follow-up questions, contact attorney Robert V. Schaller by clicking here.

Can a Taxpayer “Strip Off” an IRS Lien From a Home by Filing Chapter 7?

Did you say Chapter 7 or Chapter 13?  It makes a difference.  Keep reading…

It is not uncommon for a taxpayer’s home to be “underwater,” meaning the fair market value (FMV) of a taxpayer’s home is less than the amount owed on the senior mortgage loan. Sometimes a taxpayer with an underwater home fails to pay income taxes, causing the IRS to file a Notice of Tax Lien against a taxpayer’s property with the Recorder of Deeds for the county in which the real property is located.  This lien gives public notice of a “secret lien” that previously existed pursuant to 26 U.S.C. §6321, which attached automatically to all of a taxpayer’s property and rights to property, both real and personal, upon assessment.

These taxpayers are prevented from filing Chapter 7 bankruptcy and “stripping down” the tax lien value from the full face amount of the tax obligation to the amount that would be recoverable after the senior liens are paid in full.  The U.S. Supreme Court rejected any attempt to “strip down” a lien in a Chapter 7 bankruptcy case in Dewsnup v. Timm. Until recently, the Supreme Court had not decided whether a lien could be “stripped off” in a Chapter 7 case.

So a clever taxpayer in In re Blackburn, 525 B.R. 153 (Bankr. N.D.FL 2015) attempted to reclassify an otherwise impermissible “strip down” of a tax lien into a “strip off” by arguing the IRS’ tax liens were divisible between real property and personal property.  If divisible, the taxpayer argued, then the tax lien could be “stripped off” as to the real property while preserving the tax lien as to the personal property.

The Blackburn court stated the issue as whether the IRS tax liens were divisible. The court ruled that the IRS tax liens were NOT divisible.  Therefore, the IRS’ claim was partially secured by the personal property.  The fact that there is no equity in the taxpayer’s real property over and above the senior mortgage did not render the IRS’ tax lien totally unsecured.  The IRS’ tax lien remained, at least in part, secured by the taxpayer’s personal property.  Consequently, the court rejected the taxpayer’s attempt to “strip off” the tax lien finding the taxpayer was actually attempting to “strip down” the tax lien, which was prohibited by the US Supreme Court in Dewsnup v. Timm.

Practice Pointers:  A taxpayer should attempt to file a Chapter 13 case instead of a Chapter 7 case if the taxpayer’s goal is to “strip down” a tax lien.  It is permissible to both “strip down” and “strip off” a tax lien in Chapter 13 bankruptcy cases.

For follow-up questions, contact attorney Robert V. Schaller by clicking here.