IRS Debt in a Chapter 13 Bankruptcy

In a case out of the Eastern District in 2008, the joint Chapter 13 debtors owed the IRS a debt of nearly $90,000.00, partially secured. The debtors proposed to pay the IRS directly but were less than clear on the terms of such repayment. The IRS objected asserting its right to be paid through the office of the Chapter 13 Trustee. The court noted that under Section 13.25(a) there are three options for the treatment of secured claims: one, obtain acceptance of the treatment by the affected creditor, two, surrender the collateral to the creditor, or three, provide for the retention of the existing lien by the creditor with a promise of future property distributions (such as deferred cash payments) whose total value, as of the effective date of the plan, is not less than the allowed amount of this creditor’s secured claim.

The court labeled the debtor’s proposed treatment as “so deficient that it precludes much evaluation or discussion of its deficiencies.” The debtors neither achieved consent nor surrendered the collateral and the proposed treatment was “murky and amorphous”.

The court discussed whether it was problematic for the debtor to be the disbursing agent. Under fifth circuit president, the bankruptcy court has broad discretion in whether or not to approve such arrangements. While the IRS’s objection was relevant, it was not necessarily determinative. Coupled with the absence of any justification for the arrangement in the debtors’ proposal, it was rejected and confirmation over the plan was denied.

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