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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 38879
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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In a Chapter 7 where Trustee sells real property, & debtor

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In a Chapter 7 where Trustee sells real property, & debtor claims D5 exemptions & property has 1st mortgage, plus statutory IRS tax liens, plus a City gov't lien ($7,400) for "costs of nuisance abatement on real property," PLUS, there are other priority UNsecured non-dischargeable IRS tax debts assessed pre-petition... my question, is: assuming there is enough proceeds from the sale after admin expenses are paid first, what is the ORDER that these claims will be paid? Particularly, I can't find the Code explaining when and in what order the D5 exemptions are paid ... are they paid AFTER all the secured liens (including the tax liens) but BEFORE the priority UNsecured tax debts?
Submitted: 7 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 7 years ago.

There are two types of tax claims: secured and unsecured. A secured claim recorded against property by the IRS prior to the filing of the bankruptcy petition is entitled to priority over your exemptions, including your homestead exemption. U.S. v
(9th Cir 1947) 158 F2d 657, cert denied (1947) 331 US 831.


An unsecured tax claim, for taxes owed during the three years prior to filing of the bankruptcy petition, has priority over other creditor claims, but not over your exemptions. McIntyre v U.S. (In re McIntyre) (9th Cir 2000) 222 F3d 655; U.S. v Shanbaum (5th Cir 1994) 32 F3d 180.


Hope this helps.


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Customer: replied 7 years ago.

Thank you, XXXXX XXXXX - I'll look up the case law you cited. Background info: The property in question is a mobile home park which produces positive cash flow, but which has $100k more in liens than its assessed value, so I thought it would be exempt... and is not our residence, but for which we can claim about $17k in leftover D5 exemptions in an effort to dissuade the Trustee from selling it, and incent him to accept our buy-back offer. I need to retain the Park to support my family -- I've offered him $44,000 more than the total of secured liens, but because my buy-back offer includes assuming the 1st mortgage, his commission with the buy-back would be 1/3rd that of an outright sale... and he has repeatedly turned me down. He intends to harvest the cash flow for a year or two "until the market improves and it sells."


I have three related concerns to my first question:


1. § 522(c) states " exempted under this section is not liable ... for any debt of the debtor ... except - (1) a debt of a kind specified in paragraph (1) or (5) of section 523 (a) ... "

  • And Paragraph (1) of 523(a) says: "(1) for a tax ... (A) ...for the periods specified in section 507 (a)(3) or 507 (a)(8) ... (B) with respect to which a return, or equivalent report or notice, if required- (i) was not filed or given; or (ii) was filed...after the date [it] was last due, ... and after two years before the date of the filing of the petition;"

AND, of course, 507(a)(8) talks about taxes due within 3 years of filing, etc. (my returns were all late, and were filed either within 3 yrs, or haven't yet been filed)

  • So does the above contradict the case law you cited, because it says that exempt property (like cash otherwise payable to debtors for "d5" exemptions) IS liable for tax debts within 3 years (which mine are)? (OR, are these sections merely referring to the fact that the IRS can potentially levy or lien "exempted property" after debtor is discharged, but these sections don't require Trustee to pay the IRS directly with debtor's d5 exemption money?)

2. I can't find anywhere in Sec. 507, 503, 502, or any other sections where it states when, or in what order D5 homestead exemptions are paid vis a vis other secured claims against a property when it's sold... or where it even mentions paying D5 claims at all. Can you point me to the USC where it mentions when a Trustee has to pay these, which would have supported the Courts' decisions in the case law you cited? I'm trying to figure out if they are paid before or after other secured debt, like (a) admin expenses, i.e., Trustee commission; (b) secured mortgages against the property; (c) City gov't "mechanics" liens for hiring a contractor to remove debris from property. I'm assuming they are paid AFTER all these other secured liens.


3. If D5 exemptions are paid BEFORE all UNsecured claims, and the Trustee stated in a 341 mtg that "your D5 exemptions are no good" implying the sale proceeds wouldn't even reach them anyway... then sale proceeds sure won't reach any of the UNsecured creditors either... so how can he justify administering the asset?! Is there case law to support my assertion that the Trustee should NOT be "administering" this asset? (I.e., shouldn't he accept a buy-back offer which guarantees money for unsecured creditors, or abandon the asset if there won't be anything for unsecured creditors after a sale?)


If I need to pose these as additional questions, I'm willing to do so -- but I'd like to keep you as the attorney answering them, since you know what you're doing! Kiss

Expert:  socrateaser replied 7 years ago.

The problem is that your exemptions keep the IRS out of your hair during the bankruptcy process, because the exempt property is not part of the bankruptcy estate. However, to the extent that the taxes are nondischargeable, the IRS is in eigth place and entitled to be paid from your nonexempt property. Then, as soon as you receive the discharge order, the IRS can come right back after you for whatever nondischargeable taxes remain unpaid.


The IRS limitations on levy outside of bankruptcy are found in 26 USC §6334(a). Everything else can be reached, per §6334(c) (except ERISA-qualified accounts (which do not include IRAs).).

Customer: replied 7 years ago.

I realize that as soon as I receive the discharge, the IRS will come back at me for non-dischargeable taxes remaining. I'm not worried about that because the majority of the tax debts are tax liens, and those will be paid off via either 1) the sale of the commercial property to an outsider, or via 2) the Court accepting my buy-back offer for the commercial property, (over the Trustee's objections) which contains $100,000 in cash with which to pay the IRS off.


My concern is this: I have to convince the Court (over the Bankruptcy Trustee's objections) to accept my offer to buy back the property, by showing that my offer is better for the unsecured creditors than the Trustee's plan to hold the property, collect rents, and eventually sell it for some unknown amount, subject to the secured debts AND subject to my §522(d)(5) exemptions.


To accomplish this, I need to know:


Question 1: Situation: Debtor owns commercial real estate worth $350,000, and claims §522(d)(5) exemptions of $17,000 against it (under FEDERAL bankruptcy law) that she doesn't use to exempt her residence. Trustee sells property for $350,000. Where in 11 U.S.C. does it state how and when (the order in which) the Trustee must pay the debtor the value of her §522(d)(5) exemptions ($17,000) claimed from the sale proceeds (of $350,000) of non-exempt real estate?


(Your case law citations, McIntyre v U.S. and U.S. v Shanbaum, did not address the order 522(d)(5) exemptions had to be paid from sales proceeds of non-exempt assets sold by a bankruptcy Trustee, or whether (d)(5) exempt amounts owed to Debtor were, in fact, paid before unsecured tax debts. McIntyre and Shanbaum had to do with the fact that the IRS has the authority to levy pension benefits to satisfy tax liens. Also, the U.S. v Heffron case held that a homestead exemption prescribed by state law is ineffective against a federal tax lien. That also probably doesn't apply in my case, because my "homestead exemption" is not prescribed by state law, but by federal law, per 11 U.S.C. §522(d)(5), however, it's logical that a secured tax lien against a piece of property sold by the Trustee would be paid before a debtor's (d)(5) claims... I'd just like to have the 11 U.S.C. section that references anything about the Trustee paying (d)(5) claim amounts to the debtor.)



Question 2: Assuming, as you stated, that §522(d)(5) exempt amounts are paid AFTER secured IRS tax liens, but BEFORE any other UNsecured creditors' claims (including IRS unsecured priority tax claims), from the sale proceeds of non-exempt property sold by the Trustee.... then, if the Trustee told me that my claiming (d)(5) exemptions against the property "wouldn't do me any good" because the "sale proceeds won't reach that far," then basically what he's saying is that there won't be any proceeds available to distribute to UNsecured creditors either. In that case, is there any case law to support the assertion that the Trustee should not "administer the asset" (i.e., should NOT sell the property), if all he's going to do is pay off "secured creditors" with NOTHING going to unsecured creditors? Any case law about this would help me present my case to the Court to force the Trustee to accept my buy-back offer, which provides $44,000 MORE than what's owed to secured creditors.... since he shouldn't be administering the asset in the first place if it won't benefit the unsecured creditors. He's only admistering the asset in order to increase his own commission.



Expert:  socrateaser replied 7 years ago.

A1: Except to the extent that the debtor is entitled to exemptions, the assets will be sold by the trustee, and the proceeds will be distributed among the creditors in the order of their statutory priority. In other words, the trustee must reserve the money for your exemptions and then follow the priority for payment. This is not stated expressly anywhere in the Bankruptcy Code. It's just the way it's done.


Also, the IRS tax liens have priority over your federal exemptions exactly the same as they have over state exemptions -- I can't find a specific case to support this, but I know it's true.


A2. The exempt money is set aside, then the claims are paid in priority, and when the trustee reaches priority 8, the trustee will pay the unsecured IRS claims from the money, and if that money is exhausted, the trustee will start using your exempt money to pay the taxes.


I don't know if this is making sense or not.

Customer: replied 7 years ago.

Okay, I want you to know that I AM going to give you a "gift..." and I'm not just putting you off! But I feel I'm very close to "getting this," and I don't want to click the "accept" button just yet and not be able to ask you any more follow-up questions... (When I do click the accept button, will I still be able to start new questions for you to answer?)


I'm trying to understand what you just said. You said, "In other words, the trustee must reserve the money for your exemptions and then follow the priority for payment." Okay - where in this "priority for payment" does the debtor come with regard to receiving her (d)(5) payment? Are you saying the Debtor's (d)(5) exemptions are basically defined in the ranking order as "unsecured claims," and therefore that they only get paid AFTER all priority unsecured claims (including, of course, unsecured IRS tax claims which are in place 8 out of 10 per §507) are paid in full?


You said, ".... and if that money is exhausted, [i.e., the money from the proceeds of the sale of non-exempt property which was NOT set aside as "exempt money,"] the trustee will start using your exempt money to pay the taxes." Does this mean that the debtor is not entitled to receive (d)(5) exempt money unless all secured debt against the property AND all 10 types of "priority unsecured" creditors have been paid in full?


If the answer is "yes" to both of these questions, then I don't understand what you meant in your first response, when you said, "An unsecured tax claim, for taxes owed during the three years prior to filing of the bankruptcy petition, has priority over other creditor claims, but not over your exemptions." That seems to contradict the above. "Exemptions" and "exempt money set aside from the sale of non-exempt assets" are the same thing, aren't they?



I printed the following definitions (for my sake) from

  • priority The Bankruptcy Code's statutory ranking of unsecured claims that determines the order in which unsecured claims will be paid if there is not enough money to pay all unsecured claims in full. For example, under the Bankruptcy Code's priority scheme, money owed to the case trustee or for prepetition alimony and/or child support must be paid in full before any general unsecured debt (i.e. trade debt or credit card debt) is paid.
  • priority claim An unsecured claim that is entitled to be paid ahead of other unsecured claims [ like the debtor's (d)(5) exemptions? Are they considered "unsecured claims"? ] that are not entitled to priority status. Priority refers to the order in which these unsecured claims are to be paid.

Thanks again.

Expert:  socrateaser replied 7 years ago.

Read this. It should answer all of your procedural questions.

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