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Part 5. Collecting Process

Chapter 9. Bankruptcy

Section 6. Processing Chapter 7 Bankruptcy Cases

5.9.6  Processing Chapter 7 Bankruptcy Cases

5.9.6.1  (04-01-2006)
Introduction

  1. Chapter 7 Liquidation. Liquidation under Chapter 7 of the Bankruptcy Code has traditionally been 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.

    1. Chapter 7 provides relief to debtors regardless of the amount of the debts owed or whether a debtor is solvent or insolvent.

    2. Debtors' 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.)

    3. While corporations and partnerships do not receive a discharge under Chapter 7, few, if any, assets remain from which to collect tax liabilities not paid by the bankruptcy estate.

    4. A bankruptcy discharge does not extinguish a tax lien on property.

  2. Parties. A Chapter 7 bankruptcy involves three major parties: the debtor, the trustee, and 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 Exhibit 5.9.1-1, Glossary – Bankruptcy Terms.)

5.9.6.1.1  (04-01-2006)
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.

5.9.6.1.2  (04-01-2006)
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 USC § 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 office of the United States Department of Justice. A Chapter 7 trustee can also be elected by creditors.

  3. Trustee Responsibilities Pre-BAPCPA. The responsibility of collecting assets of the estate, which may include converting property to cash, avoiding unperfected liens, and setting aside preferential, fraudulent, and/or unauthorized transfers falls to the trustee. If the business of the debtor is authorized to continue operating under 11 USC § 721, the trustee may, without notice or hearing, sell or lease property of the estate in the ordinary course of business. The trustee:

    1. examines claims of creditors and objects to those claims when appropriate;

    2. is charged with investigating the finances of the debtor;

    3. files tax returns for the estate when required and pays taxes if due;

    4. may object to a debtor's receiving a discharge if the debtor is uncooperative, found hiding assets, or is otherwise interfering with the effective administration of the case; and

    5. must file a final report with the court and the United States Trustee at the conclusion of the case (any creditor, including the IRS, may object to this report).

  4. Trustee Responsibilities under BAPCPA. In addition to the trustee duties listed in paragraph (3) above, BAPCPA has given the United States trustee the following duties for Chapter 7 cases filed on or after October 17, 2005.

    1. Means Testing. The US trustee (or bankruptcy administrator, if any) must apply a means test to individuals who file Chapter 7 bankruptcies and who owe primarily consumer debt. The standards for this means test are based in part on the IRS national and local expense standards used in resolving delinquent tax accounts. If the debtor fails to meet the means test, the court, the US trustee, or in certain cases any party in interest can move for dismissal or conversion. This IRM will not go into detail on the mechanics of the process. 11 USC § 707(b)(2) provides a comprehensive explanation of means testing.

    2. Presumption of Abuse. The US trustee is obligated, in the case of an individual who files Chapter 7 bankruptcy, to review all materials the debtor has filed and, not later than ten days after the first meeting of creditors, file a statement with the court stating if a debtor's case is presumed to be an abuse of Chapter 7. The court must supply a copy of that statement to all creditors within five days. Within 30 days of the US trustee's filing a statement that the presumption of abuse arises, (s)he must file a motion for conversion or dismissal or file a statement explaining why (s)he does not think filing such a motion is appropriate.

      Note:

      The debtor's attorney's signature on cases filed on or after October 17, 2005, constitutes certification the filing is well founded in fact, is warranted by existing law, and is not an abuse of the bankruptcy process. The court may assess civil penalties against the attorney if it finds the attorney was negligent in his investigation into the circumstances of the bankruptcy. (See Rule 9011, Federal Rules of Bankruptcy Procedure.)

5.9.6.1.3  (04-01-2006)
Chapter 7 Tax Refunds to Trustees

  1. Property of the Estate. A Chapter 7 debtor's right to a refund (where the refund statute has not expired) is considered property of the bankruptcy estate to the extent the refund is attributable to prepetition events. As such they are subject to turnover to the Chapter 7 trustee even though the debtor may be in full tax compliance.

    Example:

    If a debtor files a Chapter 7 petition on October 12, the amount of his refund attributable to January 1 through October 11 is property of the bankruptcy estate.

  2. Turnover Procedures. The IRS and the Executive Office of the US Trustees (EOUST) have agreed to the following conditions for the Service's turning over taxpayers' income tax refunds which are considered wholly or partially property of the Chapter 7 bankruptcy estate.

    1. The trustee must request the turnover of refunds in writing for specific taxpayers. The trustee may use a form prepared by the IRS or may request the turnover on official letterhead.

    2. The US Trustee's office will encourage trustees not to submit long rosters of their debtor inventories and to refrain from requesting small dollar refunds; however, the Service will not refuse to accept rosters or small dollar requests.

    3. Insolvency will honor trustees' requests for turnover for 180 days from receiving the turnover request or for 180 days after the due date of a return (including extensions), whichever is later. If no return is received within these 180 day periods, the turnover request will not be honored.

      Example:

      If a trustee submits a turnover request on February 12, 2006, for a 2005 tax year refund, Insolvency will turnover any refund available up to and through April 13, 2007, assuming the debtor has an approved extension to file his 2005 return no later than October 15, 2006.

      Example:

      If a trustee submits a turnover request on February 12, 2006, for a 2004 tax year refund, Insolvency will turnover any refund available up to and through August 11, 2006 (180 days after the request is made).

    4. Insolvency will not compute prepetition and postpetition refund allocations, nor amounts due the debtor as opposed to a non-debtor spouse in the case of a jointly filed return. Those calculations will be completed by the trustee. The trustee is responsible for refunding monies for postpetition allocations and to non-debtor spouses if applicable.

    5. As soon as the turnover notice is received, Insolvency will input the appropriate bankruptcy freeze code and closing code on related accounts to hold the refund . If no account is found on IDRS, the Insolvency caseworker will create a dummy module with the appropriate freeze (TC 520 cc81) to hold credits.

      Note:

      When no accounts are on IDRS and the bankruptcy is a joint filing, dummy accounts must be established for both husband and wife in the event the spouses file separately for the refund period. (If one spouse's SSN is not on master file, a dummy account cannot be established for that spouse.)

    6. Trustee requests for refund turnover received after the refund has been remitted to the debtor or before a pending refund can be intercepted will not be honored.

    Note:

    The turnover agreement procedures do not limit either the Service's right of setoff or domestic support agencies' rights of setoff.

  3. Turnover Processing Steps. Exhibit 5.9.6-2 provides specific guidance for processing Chapter 7 trustee turnovers.

  4. Refund Turnover Requests for Discharged Cases. If a taxpayer files a return for a prepetition period after a discharge has been granted and a refund credit is generated, the automatic stay is no longer in effect. That credit may be offset against any existing federal tax debt owed by the taxpayer. If a trustee has requested a turnover of that refund credit, Insolvency should first offset the credit against the current tax liabilities, and any remaining credit should be manually refunded to the trustee.

    Note:

    FMS will offset any appropriate amounts from the refund turnover through the Treasury Offset Program before the manual refund goes to the trustee. No bypass indicator (BPI) code should be used on Form 5792. (See IRM 5.9.4.4.3,Offsets to Other Agencies.)

  5. Reopening a Closed Case. A MyEureka report must be run weekly to identify discharged cases that have been closed on AIS for which a trustee turnover request continues to be in effect. The report will select closed cases with a T or a + in the case class field.

    Note:

    When ADS systemically inputs TC 971 ac100 on an account to begin MFT 31 mirroring, a + automatically generates in the case class field overriding any other code (e.g., T or Y) that might be present.


    The caseworker must take the following actions for cases listed on the MyEureka report:

    1. Access the case on AIS and remove the "closed on AIS" date.

    2. Change the + to a T for cases that are being mirrored.

    3. Ensure IDRS has an open TC 520 cc81 on all related SSNs to freeze future refunds.

    4. If necessary, update the 180 day follow-up date on the AIS letter screen to reflect an accurate turnover hold period.

    Reminder:

    A trustee's request for turnover of a prepetition refund does not preclude the requirement that closing actions be initiated within 30 days of receipt of notice of discharge or dismissal, or change the timeframe for release of liens in IRM 5.9.17.11.

  6. Actions on Discharged Cases after the Turnover. Caseworkers must take the following actions on cases where discharge actions have been completed, and the trustee turnover request for all periods has been addressed.

    1. Remove the T from the case class field.

    2. Reverse the TC 520 freeze codes manually on all related SSNs. TC 522 must be input on non-petitioning spouse accounts.

    3. Document the AIS history: "Removed T from case class field since refund was issued."

    4. Re-input a closed on AIS date using the current date.

5.9.6.2  (04-01-2006)
Eligible Entities

  1. Petitioners. Any person, with the exception of governmental units, railroads, insurance companies, banks and other financial institutions, can file a Chapter 7 petition. Eligible entities include the following:

    • 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.

5.9.6.3  (04-01-2006)
Referrals to Insolvency

  1. Referrals to Insolvency. Non-Insolvency IRS employees must send a referral on Chapter 7 cases to the Centralized Insolvency Operation (CIO) as soon as they learn a bankruptcy has been filed (same day notification, if possible). CIO phone numbers for internal referrals can be found on SERP. The referral to Insolvency may be made by telephone or facsimile to a CIO liaison. Or a written inquiry referral can be sent by overnight courier to the CIO at 11601 Roosevelt Blvd, Mail Drop Point N781, Philadelphia, PA 19154. The outside of the envelope containing written referrals must be marked "expedite."

5.9.6.4  (03-01-2007)
Field Insolvency Groups

  1. Assignments. Upfront clerical work on all Chapter 7 cases is performed by CIO clerks. Field Insolvency groups work all Chapter 7 Asset cases by perfecting automated proofs of claim if necessary, preparing manual proofs of claim on cases that cannot be processed through APOC, applying payments, and taking closing actions except for dismissals and MFT 31 transfers. If a Field caseworker wants a closure delayed on a Chapter 7 No Asset case, (s)he must open an OI screen on AIS. (See IRM 5.9.5.11,Preventing Inadvertent Closure.)

  2. Complex Issues. Cases identified to have complex issues and assigned to CIO should be transferred to Field Insolvency to resolve the issues. (See IRM 5.9.1.3(3), Complex Issues.) Once the complex issues have been addressed and resolved, generally the cases should be transferred back to the appropriate CIO unit.

5.9.6.5  (03-01-2007)
Centralized Insolvency Operations

  1. Assignments. The Centralized Insolvency Operation works all Chapter 7 No Asset cases. The CIO loads all Chapter 7 cases, runs IIP and works the subsequent reports, posts payments received outside of bankruptcy when those payments are received at the CIO address, and closes all Chapter 7 No Asset cases. Complex issues as defined in IRM 5.9.1.3(3) may be transferred to Field Insolvency for resolution.

5.9.6.6  (04-01-2006)
Automatic Stay

  1. The Automatic Stay. IRM 5.9.3.4 provides an overall explanation of the issues involved in the imposition of the automatic stay. Absent a court order to terminate the stay 30 days after the petition date or to deny the imposition of a stay due to abusive filing, the stay is lifted at the time the case is closed by the court or dismissed, or in the case of an individual filer, until the time a dismissal is ordered or a discharge is granted or denied. The stay against property of a Chapter 7 estate continues until such property is no longer property of the estate (i.e., the property is being administered by the trustee). (See IRM 5.9.2.9, The Effect of Bankruptcy on Collection.)

  2. 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, if allowed, and the period of the statute suspension for collection (plus six months) on any non-discharged tax in Chapter 7 cases are generally short.

  3. Preventing Stay Violations. An account in a bankruptcy commenced before October 17, 2005, or an account in a bankruptcy commenced on or after October 17, 2005, and for which no order is issued to limit or eliminate the automatic stay must remain under freeze codes (TC 520s). The Service must exercise due diligence to conform with the provisions of the Bankruptcy Code to avoid violating the automatic stay. IRM 5.9.5.7, Serial Filers, details actions to take when the court orders variations to the automatic stay.

5.9.6.6.1  (03-01-2007)
Debtor Payments on Dischargeable Taxes

  1. Payments Received for Dischargeable Tax. When a payment is received from a debtor after a bankruptcy petition is filed, and the debtor directs it be applied toward a dischargeable tax liability, the payment generally cannot be retained by the Service. In most circumstances that will mean returning the uncashed check to the debtor. If a payment by check is received prior to the bankruptcy petition's being filed, the check may be cashed after a bankruptcy petition date without violating the automatic stay.

    Note:

    A debtor may voluntarily pay a discharged tax. (See 11 USC § 524(f).) Therefore, if a debtor knowingly and voluntarily pays a discharged tax after the discharge is granted, the Service may retain it.

  2. Payments Applied to Dischargeable Tax. If a voluntary postpetition payment has posted to a dischargeable tax period and no non-dischargeable periods exist, the payment generally must be refunded. But see 11 USC § 524(f). The Service must initiate the refund process within two days of identification of receipt of the payment. To refund a payment Insolvency must complete and expedite a Form 5792, using established manual refund procedures. (See IRM 5.9.16.4,Manual Refunds.)

    Note:

    Unless evidence exists the debtor knows (s)he is not obligated to pay the discharged liability (such as a letter from the debtor stating as much), Insolvency will assume the payment has been made in error, and a refund will be issued. If an Insolvency caseworker is unsure if the refund should be sent to the trustee or to the debtor, guidance from Counsel should be sought.

  3. Payments to Non-dischargeable Periods. If a voluntary postpetition payment has posted to a dischargeable tax period and a non-dischargeable period exists, the payment should be transferred from the dischargeable module to the non-dischargeable period.

    Note:

    Debtors, aware of penalties and interest that will accrue on non-dischargeable taxes, may make periodic payments outside of an installment agreement on those periods to lessen their tax burden after the close of bankruptcy.

5.9.6.6.2  (04-01-2006)
Voluntary Payments on Non-Dischargeable Taxes — Prior Installment Agreement

  1. Non-Dischargeable Taxes. When a debtor continues to make voluntary payments for non-dischargeable taxes pursuant to a pre-existing installment agreement after filing a Chapter 7 bankruptcy petition:

    1. the Service can usually accept such payments, including payroll deduction payments, without violating the automatic stay;

    2. Insolvency should document the AIS history screen with pertinent information relating to such payments, including any contacts made with the debtor on this matter; and

    3. should legal advice be required in this type of situation, Insolvency must confer with Counsel.

5.9.6.7  (03-01-2007)
Opening a Chapter 7 Case

  1. Asset/No Asset. Upon receipt of a Chapter 7 case by Centralized 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."

    Note:

    The CIO must load all new cases on AIS and run IIP processes C and D within five workdays of receipt. (See IRM 5.9.12.6,Insolvency Interface Program .)

  2. No Asset Case. The IRS and other creditors do not receive payments (or dividends) from the bankruptcy estate in a no asset case. For IRS purposes a no asset case is defined as any case:

    • where the trustee determines "no dividend " will be paid

    • in which assets of the debtor are less than allowed exemptions and costs of administration

    • involving a partnership or corporation where the costs of administration exceed the value of the assets

    Note:

    Since tax liabilities on unfiled returns are not dischargeable in Chapter 7 No Asset cases and no proof of claim is filed, the Service will not expend resources on procuring unfiled returns through the bankruptcy process on those cases.

  3. Stay Research Required. No asset cases filed prior to October 17, 2005, require limited or no follow-up. To prevent violations of the automatic stay on those cases, TC 520 with the applicable closing code is input when the IRS is listed as a creditor. Follow-up on specifically identified cases filed on or after October 17, 2005, is required to check for possible stay variations resulting from serial filings. IRM 5.9.5.7,Serial Filers, and Exhibit 5.9.6-1 provide procedures for the CIO to work stay variation reports on the Chapter 7 cases assigned to its inventory. 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.

  4. CC 84 and Corporate Chapter 7 Cases. IIP is programmed to input closing code 84 on all Chapter 7 cases with an 1120 filing requirement. This closing code cannot be changed. Closing code 84:

    1. allows an assigned revenue officer to complete TFRP investigations and assessment determinations;

    2. permits an assigned revenue officer to close the case as currently not collectible;

    3. alerts ACS or field Collection not to take collection actions without first contacting Insolvency;

    4. does not suspend the CSED;

    5. does not move the account to Status 72; and

    6. does not prevent collection actions.

  5. ACS and CC 84. An account assigned to ACS may display a TC 520 cc84. The CIO must access ACS when the case is identified on the IIP "stat 22 notice" and ensure any outstanding levies are released and any liens filed after the TC 520 date are withdrawn. After necessary actions are taken by the CIO, including determining if an OI is appropriate for a TFRP investigation, the case should be moved to the queue to delete it from ACS inventory. If ACS identifies a bankruptcy closing code 84 before Insolvency makes contact, ACS should put a 45 day hold on the account to allow sufficient time for the CIO to take necessary actions.

  6. Consolidated Filings. Under consolidated group regulations, each member of the group is severally liable for the income taxes of the group for each year it was a member. However, the Service makes only one assessment which is in the name of the parent of the group. The procedures in IRM 5.9.17.9.1,Consolidated Chapter 11 Filings, should be followed before a parent's Chapter 7 account is closed as currently not collectable so the group's liability can be collected from other members if possible.

  7. Conversion of Corporate Chapter 11 to Chapter 7. When corporate Chapter 11 cases convert to Chapter 7 proceedings, TFRP determinations may already be underway or completed. If a TFRP investigation has not been requested on the case and the trust fund amounts exceed the tolerance set in LEM 5.4.2, per local procedures the case should be referred to an Insolvency advisor or to field Collection to conduct the TFRP investigation. Barring local practice to the contrary, the TC 520 freeze code used for the Chapter 11 bankruptcy may remain on the account when it is converted to Chapter 7.

  8. Conversion of Individual Chapter 11, 12, and 13 Cases to Chapter 7. Two types of postpetition, pre-conversion taxes must be considered in a converted case of an individual. (See 11 USC § 348(d).)

    1. Taxes that were entitled to be paid as administrative expenses of the pre-conversion case remain administrative expenses in the Chapter 7 case. (Typically only Chapter 11 estates owe administrative expense taxes.)

    2. Taxes owed by the debtor for postpetition, pre-conversion periods are considered for all purposes as claims that arose on the day before the bankruptcy petition was filed; that is, they are considered prepetition, priority tax claims that are nondischargeable. Usually a debtor who is an individual incurs income tax liability for earnings for tax years ending during the time (s)he is in Chapter 11, 12, or 13 bankruptcy. Under BAPCPA § 1115 and the separate taxable entity rule of IRC 1398, income taxes on earnings during a Chapter 11 case may be taxable to the estate and considered administrative expenses of the pre-conversion case.

  9. Initial Review of Individual 7 Asset Cases. When an individual debtor who files Chapter 7 bankruptcy has non-exempt assets, those assets can be available for satisfying the claims of creditors. Asset cases require complete processing, and appropriate research must be conducted by Insolvency.

    1. Stay Review. Cases filed on or after October 17, 2005, should be reviewed for dismissals of previous bankruptcies within one year of the current bankruptcy. For cases filed on or after October 17, 2005, the caseworker assigned to the 7 Asset case must check for possible stay variations resulting from serial filings. IRM 5.9.5.7,Serial Filers, and Exhibit 5.9.6-1 provide procedures for working stay variations.

    2. Discharge Limitations. Chapter 7 debtors normally receive a discharge under Chapter 7 subject to certain exceptions. One exception is a waiting period between the receipt of discharge in a prior bankruptcy and the filing of a petition in the current case. Further, for cases filed on or after October 17, 2005, the waiting period has been extended when a Chapter 7 debtor has previously received a discharge under Chapters 7 or 11. BAPCPA did not alter the waiting period when the previous bankruptcy was filed under Chapters 12 or 13. Failure to satisfy the minimum time limitation will result in the debtor's liabilities being non-dischargeable. IRM 5.9.5.7(9), Discharge Limitations, and Exhibit 5.9.5-3 provide instructions for reviewing accounts for allowable elapsed time between discharge and subsequent bankruptcy filings.

    3. Unfiled Returns. BAPCPA provides for conversion or dismissal in the case of unfiled returns. IRM 5.9.4.17,Unfiled Prepetition Returns, explains how the Service advises trustees of unfiled returns for Chapter 7 Asset cases and all other cases for which a proof of claim is prepared.

    4. Lien Refile Determinations. A lien refile review must be conducted during initial case review if a secured claim will be filed by the Service or the Service has identified excluded property that may be used to satisfy the taxpayer’s liabilities after the discharge has been granted. A second lien refile review may be required if the distribution is anticipated to be after the self-release date of the current NFTL. A follow-up date may have to be input on AIS to coincide with the refile window so a timely review can be conducted.

    5. Documentation. All actions taken and findings in the review must be documented in the AIS history.

  10. Initial Review of Business Chapter 7 Asset Cases. With the exception of reviewing for adequate protection, the initial review for Chapter 11 BMF cases outlined in IRM 5.9.8.4,Initial Case Review for Chapter 11, should be followed for BMF Chapter 7 Asset cases. Insolvency specialists must conduct an initial case review and take primary case actions within 10 work days of the case's being assigned to a specialist or advisor. Elements of this review may be required sooner, for example, to resolve stay violations or to respond to pending motions or defensive litigation. All actions taken and findings in the review must be documented in the AIS history.

5.9.6.8  (04-01-2006)
Proof of Claim - Asset Cases

  1. 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. 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. The procedures for filing claims in Chapter 7 are set forth in Bankruptcy Rules 3001 and 3002.

  2. 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 5.9.13.20.1,Unassessed Claims.)

  3. Monitoring. If Insolvency files an unassessed claim based on a pending assessment, it must monitor the case 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, or file a $0 claim if appropriate. (See IRM 5.9.13.20.1(9), Withdrawal of Unassessed Claim.)

  4. 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.

  5. Objections to Claims. The duty to object to any duplicative, overstated, previously paid, or otherwise questionable proof of claim falls to the trustee. Objections to a claim may also be made by other parties, including the debtor.

5.9.6.8.1  (03-01-2007)
Bar Date

  1. Timeframe. To be considered timely a Chapter 7 proof of claim must be filed with the bankruptcy court by the later of:

    1. 180 days after the date of the order of relief (i.e., before the 180-day period has run after the order for relief, generally the petition date, unless an involuntary petition has been filed by creditors); or

    2. 90 days after the § 341 meeting.

  2. Late Claim Allowed. For Chapter 7 cases filed prior to October 17, 2005, if a claim was 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. For Chapter 7 cases filed on or after October 17, 2005, late filed priority claims are to be paid with timely filed priority claims if they are filed by the earlier of:

    • the date that is ten days after the mailing to creditors of the summary of the trustee's final report, or

    • the date on which the trustee commences final 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 5.9.13.8.1(3), Bar Date Extension.)

5.9.6.9  (04-01-2006)
Chapter 7 No Asset Process

  1. Pre-BAPCPA Chapter 7 No Asset Process. Following are the steps typically involved in a Chapter 7 No Asset bankruptcy filed prior to October 17, 2005.

    1. The petition is filed.

    2. The § 341 meeting of creditors is held.

    3. The trustee checks for assets.

    4. The trustee approves and files a report of no distribution.

    5. The court enters discharge (normally 90 to 120 days after the filing of the petition), or enters denial of the discharge (for individuals).

    6. The court approves the no asset report and excuses the trustee.

    7. The case is closed.

5.9.6.10  (04-01-2006)
Chapter 7 Asset Process

  1. Pre-BAPCPA Chapter 7 Asset Process. The steps in a Chapter 7 Asset bankruptcy typically are:

    1. The petition is filed;

    2. The § 341 meeting of creditors is held;

    3. The trustee files an interim report of assets;

    4. The trustee checks for any additional assets;

    5. A proof of claim is filed;

    6. The court enters discharge (for individuals);

    7. The trustee administers the 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.

5.9.6.11  (04-01-2006)
Post-BAPCPA Chapter 7 Process

  1. Additional Chapter 7 Processes. For both Chapter 7 Asset and No Asset cases filed on or after October 17, 2005, the following steps have been added to the bankruptcy process:

    • Debtor attends credit counseling briefing within 180 days prior to filing a petition

    • Certification by the debtor's attorney that the client's filing is not abusive (Bankruptcy Rule 9011)

    • Court provides written notice to creditors not later than ten days after the petition date if a presumption of abuse arises in an individual's case

    • Filing of trustee's statement to the court determining if the current case is presumed to be an abuse of the bankruptcy system if applicable

    • Completion of a means test by the debtor

    • Hearing on motion to convert or dismiss based on abuse if applicable

    • Determination to lift stay after 30 days or not to impose stay if applicable

    • Debtor provides most recent return to the trustee no later than seven days before the 341 meeting

5.9.6.12  (04-01-2006)
Subordination of Federal Tax Lien

  1. Subordination. 11 USC § 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 USC § 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 5.9.6.19, Distribution, and IRM 5.9.4.5.1(6),Certificate of Discharge.)

  2. Administrative Expenses. For cases filed before October 17, 2005, the Service's claim for administrative expenses that accrue during the bankruptcy proceeding is entitled to priority classification under 11 USC § 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:

    On cases filed prior to October 17, 2005, in addition to the federal secured tax claim, state and local secured tax claims are also subordinated.

  3. BAPCPA Amendment. BAPCPA has amended 11 USC § 724(b) for Chapter 11 cases filed on or after October 17, 2005, which are converted to Chapter 7 Asset cases. In those cases the tax lien will not be subordinated to administrative claims incurred in the prior Chapter 11 case except for the following:

    • Wages

    • Salaries

    • Commissions

    Further before the trustee can subordinate a tax lien on personal or real property, the trustee must:

    1. exhaust the unencumbered assets of the estate, and

    2. recover from property securing an allowed secured claim the reasonable and necessary expenses of preserving or disposing of the property.

    Note:

    Tax liens arising in connection with ad valorem taxes on property, are no longer subordinated with exceptions being claims for wages, salaries, and commissions, or for contributions to an employee benefit plan.

5.9.6.13  (03-01-2007)
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 rights to distribution based on its 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.

    Note:

    Chapter 7 trustees have in the past avoided the fixing of the Service's lien on motor vehicles by arguing they assume the status of purchaser under IRC § 6323. Under the provisions of BAPCPA, trustees cannot assume the status of a purchaser.

  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 5.9.4.5.1,Sale of Property Considerations. )

  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. 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 US Trustee encourages trustees to evaluate the tax aspects of any sale and discourages them from administering any property with significant tax consequences.

  5. Objections to Sale. Insolvency caseworkers should review sale motions with tax consequences in mind and object to sales when appropriate, as provided in IRM 5.9.4.5.1(8), Tax Consequences.

    Note:

    In rare instances estate property may be abandoned after the debtor has received a discharge, but before the court has closed the case. If the Service records an NFTL after the debtor receives a discharge but before the abandonment of the property and court closure, the federal tax lien will attach to the property once it is abandoned. 11 USC §554(c).

5.9.6.14  (04-01-2006)
Trust Fund Recovery Penalty

  1. Corporation and Responsible Officers in Bankruptcy. Assessment of the Trust Fund Recovery Penalty (TFRP) under IRC § 6672 becomes an issue when a corporation, having unpaid trust fund liabilities, files a Chapter 7 petition. In addition, the potentially responsible persons of the corporation may have filed their own bankruptcy petitions.

  2. Objections Filed by Responsible Persons. The responsible persons frequently object to the TFRP investigation the IRS conducts against them, claiming trust fund taxes will be paid through the corporate bankruptcy proceeding.

  3. Field Compliance Assignment. If research on corporate asset Chapter 7 cases shows balance due accounts or return delinquency periods assigned to field Collection, Insolvency should contact the revenue officer (RO) group to determine what information is available on the case.