Why can the IRS use a refund to pay off dischargeable taxes?

The client owes $15,000 in taxes for the 2004 tax year, and you’ve done the analysis and determined that this is a dischargeable debt.  He also owes $10,000 for the 2009 tax year, and this isn’t dischargeable.  For some reason, no notices of federal tax lien are on file, so there is no question of a secured debt (or so you think).  After filing his 2011 tax return, he gets a $12,000 refund.  You’re filing his chapter 7 petition tomorrow.  What happens to the refund?

Answer: it pays off $12,000 of the dischargeable tax from 2004, and none of the 2009 liability.
Why, you ask?  And then, depending on your temperament, you may even add the phrase “that ain’t fair” after your question.  After all, the IRS didn’t have a Notice of Federal Tax Lien, so why does it get to pay itself on a tax debt that is going to be discharged?

The reason is that the 2004 tax debt, while dischargeable, is also secured, specially if the person gets to know the Different Types Of Loans. IRC Section 6321 puts a silent lien on all property of a tax debtor to secure the payment of tax. When the taxpayer gives the IRS money in the form of excess withholding of tax, the IRS has a lien on that money to pay the delinquent tax.  Because this is not a voluntary payment, the IRS, not the taxpayer, gets to determine where the tax refund will be applied.

So, as of December 31, 2011, the taxpayer-debtor had a credit of $12,000 on his 2011 tax account (even if this computation did not take place until a few months later). He also owed $15,000 on the 2004 tax year, which we assume is the oldest collectible tax delinquency. When he files his bankruptcy petition on February 15, 2012, the IRS is in possession of his tax refund, and it may use it as an offset against the 2004 debt – prepetition asset against prepetition liability. So what if the 2004 liability was going to be wiped out in the bankruptcy? At the end of the 2011 tax year, when the IRS had full possession of the tax refund, the liability existed.

The good news for your debtor: the IRS won’t apply his 2012 refund against the 2004 liability, because the 2004 liability will have been discharged.

Notes on Moving Judges

Judge Kwan will be moving into courtroom 1675 in Los Angeles.   Judge Peter Carroll is moving into courtroom 1468 in March or April.  Judge Mark Houle will be taking courtroom 303 in Riverside.  Judge Catherine Bauer will move into courtroom 5D in Santa Ana.

Judge Ted Albert Tentative Clarifies (Somewhat) Issues on Modification of Loan on Residence

8:11-20215  [debtor]     Chapter  11

#10.00 Motion to Value Property of the Estate Pursuant to 11 U.S.C.  Section 506(a)

Tentative Ruling:
The motion is for valuation of collateral known as 2xxx Santa Ana Ave., Costa Mesa (“property”) under §506, but the real question presented here is whether a Chapter 11 Plan can treat the junior trust deed claim of Citibank as only partially secured since the debtor contends there is only $287,000 in value to support two trust deeds of $202,410 and $510, 968.  If the bifurcation can be done then the junior secured claim is only around $85,000.  The impediment, if any, would be §1123(b)(5) which forbids modification of claims “secured only by a security interest in real property that is the debtor’s principal residence.”  The property is apparently a duplex. While there is case law on both sides of the issue, and no definitive 9th Circuit authority, the majority of authority as represented by cases like the 3d Circuit in In re Scarborough, 461 F. 3d 406, 414 (3d Cir. 2006), suggest that since technically the lien is secured by something other than the residence (i.e. an adjoining income property) and therefore is not secured only by the residence, the statute does not apply. See also In re Boardman, 2011 WL 478987 (Bankr. N.D. Cal.).
Grant

Matthew E. Faler
17330 Brookhurst St., Ste 240
Fountain Valley, CA 92708

Judge Wallace and Failure to Comply with Section 109(h) [credit counseling]

FYI, I learned from the deputy court clerk responsible for dismissals for Judge Mark Wallace that he instructs the court clerk’s office not to automatically dismiss any of his cases for debtors failing to comply with §109(h)’s terms, even if more than 45 days pass from the petition filing date. On the other hand Judge Wallace will allow the clerk’s office to dismiss if a debtor fails to file an executed form B22A more than 45 days pass from the petition filing date.

Mark Jessee

Public Counsel has Pro Bono Cases

Hi Jon & Roksana,

Hope you are doing well!
 
We have several people waiting to be placed with pro bono counsel.  We would greatly appreciate your assistance by taking on a Chapter 7 pro bono case.   Your pro bono assistance helps pro se debtors who have nowhere else to turn to for bankruptcy assistance and guidance.
 
If you are ready to take on a case, please let me know.  I look forward to hearing from you.
Thank you in advance!
Maggie 
 
Magdalena Reyes Bordeaux
Senior Staff Attorney
Public Counsel
Consumer Law Project & Debtor Assistance Project
 
Ph:   213.385.2977 ext. 105
Fx:    213.385.9089
Em:  mbordeaux@publiccounsel.org

Maggie:  Of course.  Send them over.

Judge Catherine Bauer Chapter 13 Cases

Judge Catherine Bauer advised counsel today that all of her chapter 13 cases are being transfered to new Judge Mark Houle.

Clarification re: Filing Financial Management Certificate Form 23

ATTENTION ATTORNEY FILERS – RE: CLARIFICATION WHEN Filing Financial Management Certificate Form 23

As you may recall, with the implementation of CM/ECF v. 4.1 in November 2011, changes were made to the way the Financial Management Certificate (Form 23) is filed electronically.  Since the implementation of CM/ECF v. 4.1, we are finding that attorneys are incorrectly filing  Form 23 on joint cases.  This is not only causing the Discharge of Debtor to be delayed, but also additional work for the clerk’s office staff in monitoring these cases. To avoid errors and delays, please read and discuss the attached tips and instructions with pertinent office staff.

As always, thank you in advance for your assistance and cooperation. Please feel free to contact the ECF Help Desk at: ECF_Support@cacb.uscourts.gov with any questions you may have.

Best regards,

ECF Help Desk (213) 894-2365

Update Chapter 20 Lam Motions

Judge Catherine Bauer ruled today that a discharge is required for a successful Lam Motion.     

NACBA filed an amicus brief on this issue for an appeal in the 7th Circuit District Court.  See attached.

Appeal of Section 522(f) Issue Pending Before the 9th Circuit

From attorney Anerio V. Altman:

I have an appeal before the 9th Circuit court of Appeals with OCCU in regards to:
1.  Can a Debtor utilize the Wildcard Exemption for the purpose of avoiding a non-possessory non-purchase money security interest in collateral they claim as a tool of the trade under 11 U.S.C. 522(f)?; and
2.  Can a Debtor utilize 11 U.S.C. 522(f) for the purpose of avoiding a Non-PMSI lien in a vehicle they claim as a tool of the trade?

Debtor in this case is a realtor who claims that her vehicle is a tool of the trade.  The vehicle is worth less than $6000 by all accounts.  Debtor filed her own motion pro se, OCCU responded and we filed a chunky reply. 

Judge Albert said you can’t do it.  The District court said that we could.  And now we’re before the ninth.

The case is IN RE:  ANGIE GARCIA.  9th Appellate case number 11-56076 or District Court 10-00985. 
We don’t have a hearing date yet but all papers have been filed. 

Anerio V. Altman, Esq. #228445
Lake Forest Bankruptcy

Absent Reaffirmation is a Post-bk Ipso Facto Repo Wrongful? Can bk judge enter a final order?

I think the answers are yes and yes.  Here is why.

Post-discharge and case closure, while debtor remains current on the payment and hasn’t otherwise defaulted under the contract terms, the 9th Circuit Court of Appeals decision In re Parker still applies and the ipso facto clause is unenforceable as a matter of law.

While Stern v. Marshall restricts Bankruptcy Courts from entering final orders in traditional common law matters not necessary to resolve allowance of claims in the case, it does not prohibit the Bankruptcy Court from entering a final order in an action involving a right derived exclusively from the Bankruptcy Code despite that it relates to a traditional commonly law contract creating other “private rights” that are not governed by the Bankruptcy Code.

I.   Wrongfulness of Repossession Based Upon Ipso Facto Clause After Debtor Satisfies 521 Requirements, Despite That Court Does Not Approve The Reaffirmation Agreement

This conclusion that Parker still applies to prevent a creditor from repossessing a debtor vehicle, after entry of a Chapter 7 discharge, only based upon a default consisting of the debtor filing the bankruptcy, is supported by the recent case In re Chim, 381 B.R. 191 (Bankr. D. Maryland 2008), see reasoning at page 7:

“Prior to the enactment of BAPCPA, the Court of Appeals for the Fourth Circuit held in Home Owners Funding Corp. v. Belanger (In re Belanger), 962 F.2d 345 (4th Cir. 1992) that an individual Chapter 7 debtor's actions with respect to a secured debt and its corresponding collateral were not confined to those options enumerated then in place 11 U.S.C. § 521(2). 12 Id. at 348. [*199] Specifically, the Court held that a debtor was not required to reaffirm a debt securing property, or redeem or surrender the same. Instead, the Court agreed with those courts that follow the ride-through approach,  [**21] and held that a debtor who is current on the payments under the loan agreement may retain the property without reaffirming the debt which it secures. Id. In reaching this conclusion, the Court expressly rejected the holding in In re Bell, 700 F.2d 1053 (6th Cir. 1983) which held that an ipso facto clause becomes effective when the trustee abandons the collateral. Id. at 1058. Following its own precedent, the Belanger Court held that “…a default-on-filing clause in an installment loan contract was unenforceable as a matter of law.” Belanger, 962 F2d at 348 (citing Riggs Nat'l Bank v. Perry, 729 F2d 982, 984-85 (4th Cir. 1984)).” (emphasis added in bold)

and,

There is no reason to conclude that the rationale of Belanger should not apply with equal vigor to post-BAPCPA cases where a debtor complies with Section 521(a)(2) but the Court rejects the reaffirmation agreement. To be sure, the creditor relief provisions of Sections 362(h), 521(a)(6), and 521(d) may impact upon a debtor's option of having a credit agreement ride through the bankruptcy case in certain circumstances where the debtor fails to comply with Section 521(a)(2). However, where a court rejects a reaffirmation agreement that was timely entered into by a debtor, the debtor is left in the same position as a  [**23] debtor who elected to have the loan contract ride through bankruptcy prior to the adoption of the creditor relief provisions in BAPCPA, and the rationale of Belanger continues to apply.” (emphasis added in bold).

and based upon In re Dumont 581 F.3d 1105 (9th Cir. 2009) (which involved a vehicle purchase contract), see page 7:

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