Authority. The US Constitution grants Congress authority to enact federal bankruptcy laws. The Bankruptcy Act of 1898 formed the basis of federal bankruptcy law until 1979 when enactment of the Bankruptcy Code (11 USC) repealed the old law and codified procedures making the bankruptcy process less burdensome for the debtor. The Bankruptcy Reform Act of 1994 (BRA 94) brought about a major amendment to the Bankruptcy Code affecting the government's treatment of debtors, notably granting permission to assess taxes while the debtor is under the protection of the automatic stay.

The Bankruptcy Abuse Prevention and Consumer Protection Act. On April 20, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was signed into law. Most of the provisions of this act became effective October 17, 2005, although some provisions, such as those dealing with Chapter 12 bankruptcies, were effective upon the date of enactment.

Principle of Bankruptcy. The general underlying principle of bankruptcy was, and continues to be, to provide a debtor an avenue to pay what the debtor can afford while receiving forgiveness for debt that cannot be satisfied.

Automatic Stay. Prior to October 17, 2005, when a debtor filed a petition in bankruptcy court, in all instances the court entered an order for relief which immediately stopped ongoing and future (during the pendency of the bankruptcy) attempts by creditors to collect prepetition debts owed by the debtor or otherwise exercise control over property of the estate or the debtor (11 USC § 362). This essential feature of bankruptcy law created what is known as the automatic stay. For most debtors the automatic stay will remain in effect during the pendency of the bankruptcy. But for debtors who file bankruptcy on or after October 17, 2005, and have had one or more bankruptcy cases dismissed within the preceding twelve month period, the automatic stay may either terminate within 30 days or not go into effect at all. (See IRM 5.9.5.7,Serial Filers.)

Debtor. Most bankruptcy proceedings begin when the debtor (the person unable to pay his, her, or its debts) files a petition in bankruptcy court seeking financial relief from creditors. Individuals, corporations, partnerships, railroads, municipalities, and other forms of government have the right to file bankruptcy. Exhibit 5.9.1-1, Glossary of Common Insolvency Terms, defines "person" as it relates to bankruptcy.

Advantages to Debtors. When negotiations with creditors to pay debts fail, debtors may be faced with immediate garnishment of salaries and repossession of their assets. Business debtors may have their businesses closed through repossession or foreclosure. Bankruptcy is attractive to debtors because it can offer:

Creditor. Creditors include persons and entities who have claims against the debtor, usually for debts incurred before the bankruptcy was filed (prepetition debts). Because many debtors and bankruptcy estates continue to incur debt after the bankruptcy petition date, creditors can also hold postpetition claims. Occasionally creditors force debtors into bankruptcy by involuntary means.

Advantages to Creditors. Bankruptcy offers advantages to creditors, such as the following:

Bankruptcy Code. The Bankruptcy Code provides an orderly method for the debtor's financial rehabilitation (Chapters 11, 12, and 13) or the liquidation and distribution of a debtor's assets (Chapter 7). This federal law is intended to be applied uniformly among all states and possessions.

Jurisdiction. Bankruptcy courts generally have jurisdiction over all matters concerning payment of a debtor's financial obligations under the Bankruptcy Code and administration of the bankruptcy estate. Bankruptcy court jurisdiction includes the authority to determine the amount of tax due by the debtor or estate and what taxes will be discharged, meaning the debtor no longer will be personally liable. The bankruptcy court also has jurisdiction over any matters concerning collection of tax debts at issue in the bankruptcy case or collection from any property of the estate.

Bankruptcy Judges. Bankruptcy judges are appointed by the appellate circuit courts for a term of 14 years as provided under Article I of the US Constitution.

Introduction. Bankruptcy law is the prevailing authority when a taxpayer files bankruptcy. Bankruptcy laws are separate from tax laws, and coordination is necessary to comply with both. Insolvency, a part of the Collection function for the Small Business/Self Employed Operating Division of the IRS, is responsible for administering that coordination.

Insolvency Organizations. Insolvency is divided into a Field function consisting of more than 80 posts of duty geographically distributed throughout the country and a single Centralized Insolvency Operation (CIO) in Philadelphia.

Complex Issues. Regardless of chapter or dollar amount, Field Insolvency will handle the following tasks deemed as complex issues with a timeliness appropriate to the nature of the issue:

Non-"Complex" Cases to Be Worked by Field Insolvency. Issues not considered complex, but still required to be worked by Field Insolvency include the following:

Insolvency Responsibilities. Together the two Insolvency functions handle all bankruptcy cases and are primarily responsible for the IRS bankruptcy program.

Cessation of Collection Actions. Filing bankruptcy usually gives a debtor immediate relief from all demands for payment and collection enforcement actions. IRS employees, upon learning of a bankruptcy, generally should cease all demands and enforcement actions directed against the bankrupt taxpayer (debtor) and take prompt and appropriate corrective actions unless the court determines the automatic stay is not in effect. Revenue officers in the midst of a seizure when a bankruptcy is filed should work with Insolvency and Counsel before proceeding. Failure to observe an automatic stay may result in the Service's being sued for damages and attorney fees, although punitive damages cannot be awarded.

Coordination with Other Functions. Insolvency is charged with processing bankruptcy cases involving the IRS, as well as coordinating the activities of other functions on all bankruptcy cases. Insolvency caseworkers, leads, and managers must assist other Service employees when bankruptcy-related case issues arise and elevate the more complicated and significant issues to Counsel.

Balancing the Interests of the Debtor and the Government. Insolvency must follow established procedures to ensure debtors are afforded the protections guaranteed them under the Bankruptcy Code. Insolvency caseworkers are charged with processing bankruptcy cases fairly and efficiently in a manner that balances the interests of the debtor with the interests of the government while attempting to collect the proper amount of tax.

Redacted SSNs. To protect taxpayers' privacy documents submitted to the court by Insolvency cannot provide full Social Security numbers (SSNs). Only redacted SSNs, giving the last four numbers of an SSN, are allowed. Employer Identification Numbers (EINs) should be provided in full.

Avoiding Litigation. To avoid unnecessary litigation when disputes arise between a debtor and the Service, Insolvency caseworkers must negotiate with debtors or their representatives to arrive at a mutually agreeable solution before resorting to a referral to Counsel. Caseworkers must exercise expertise and tact during the negotiation process, dealing with debtors according to the provisions of the Bankruptcy Code and conserving government resources.

Deadlines/Referrals. Insolvency employees must analyze pending litigation issues and meet strict deadlines. When necessary Field Insolvency caseworkers prepare referrals to Counsel so the government can prepare a timely and effective case position. In bankruptcy matters involving high volume Chapter 13 cases, Insolvency must work efficiently to meet the short timeframes between petition dates and confirmation hearings.

First Meeting of Creditors. Field Insolvency specialists, advisors, or revenue officers (ROs) may attend the first meeting of creditors (§ 341 meeting) to question the debtor. (See IRM 5.9.2.4,First Meeting of Creditors.)

Expert Witness. Field Insolvency specialists or advisors testify in bankruptcy court as expert witnesses on behalf of the Service. This duty requires intensive preparation. The employee must understand the issues in dispute and capably provide expert testimony to protect the government's interests.

Overall Responsibilities. Overall, Insolvency's responsibilities extend to a commitment of the following:

provides additional information on Insolvency's role within the Service.

Other Government Agencies. Frequently, governmental departments and agencies, other than the Department of Treasury, have an interest in a pending bankruptcy proceeding. Their interest may result from:

Service Cooperation. The Service has a responsibility to cooperate and assist in collecting debts due the United States which arise out of the activities of any other department or agency. However, after the debtor files for protection of the bankruptcy court, the collection of those debts may be prohibited by the automatic stay. In these and similar situations, it will sometimes be necessary to deal with other departments or agencies of the government.

Refund Setoffs – Other Agencies. A debtor might owe no federal taxes and be due a federal tax refund. A department or agency might seek a setoff of an amount to cover an indebtedness through the tax refund due the debtor. While setoffs, other than those for domestic support on cases filed on or after October 17, 2005, are prohibited once a bankruptcy is filed because of the automatic stay imposed by the bankruptcy, the other agency may be able to obtain relief from the stay to allow setoff. Before disclosing or acknowledging the existence of a tax refund and making it available for setoff to another government agency other than for domestic support, disclosure consent must be obtained from the taxpayer. Guidance from Counsel should be obtained whenever the Service is asked to freeze a tax refund so it may be setoff against another agency's debt.

Counsel Guidance. When coordination with other government agencies or departments (except Treasury) becomes necessary in a pending or actual bankruptcy proceeding, any problems and/or recommendations should be presented to Counsel. IRM 5.9.4.4.3,Offsets to Other Agencies , and IRM 5.9.4.4.4, Federal Payment Levy Program (FPLP), provide additional information.