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Court Does Not Allow Chapter 13 Debtor to Strip Unsecured Amount of IRS Tax Lien

By Joshua Doubek (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsA Chapter 13 debtor argued that a bankruptcy court should rule that part of an Internal Revenue Service (IRS) tax lien was void. The lien was only secured debt, he claimed, up to the value of his personal property, and he asked the court to avoid the unsecured amount of the lien. The bankruptcy court ruled that federal bankruptcy law does not allow “lien stripping” in the manner requested by the debtor, and the appellate court affirmed. In re Ryan, 725 F.3d 623 (7th Cir. 2013).

The debtor reportedly failed to pay federal income tax from 2006 through 2010, and the arrearage amount totaled nearly $137,000. The IRS recorded a notice of federal tax lien against the debtor’s property in January 2011. In August 2011, the debtor filed a Chapter 13 bankruptcy petition claiming $1,625 worth of personal property. He stated that he had lost his residence due to delinquent property taxes, and that he had no vehicle or financial accounts. He filed an adversary proceeding admitting to the tax debt and asking the court to rule on the value of the tax lien.

Because the debtor only owned $1,625 in personal property, he argued that the value of the IRS’s secured claim was limited to that amount, with the remainder of the lien being unsecured debt. 11 U.S.C. § 506(a). The IRS did not dispute this point. The debtor then argued that the amount of the tax lien that exceeded the value of his personal property was void under § 506(d). This section states that a lien is void if it “secures a claim against the debtor that is not an allowed claim,” with some exceptions.

The procedure requested by the debtor differs from “lien stripping” under § 1322(b)(2), which generally only applies to secured claims that have no access to the value of the collateral, such as a second- or third-priority mortgage. A tax lien is also not subject to lien avoidance under § 522(f), which applies to judicial liens, but not statutory liens. The bankruptcy court held that § 506(d) does not allow stripping or avoidance of a secured lien. It cited Dewsnup v. Timm, 502 U.S. 410 (1992), in which the Supreme Court held that debtors could not “strip down” a lien secured by real property. Id. at 417.

The appellate court affirmed this ruling. It rejected the debtor’s argument that Dewsnup was not controlling because it involved a Chapter 7 bankruptcy instead of Chapter 13. The Bankruptcy Code states that Chapters 1, 3, and 5 apply to proceedings under Chapters 7 and 13. 11 U.S.C. § 103(a). The court also rejected arguments that it should apply different interpretations of § 506(d) to Chapters 7 and 13 based on the two chapters’ different goals.

The question of whether § 506(d) allows any sort of lien stripping remains unsettled. The Eleventh Circuit reached a different conclusion than the Seventh last year in Bank of America v. Sinkfield, affirming its own interpretation of § 506(d) despite Dewsnup. While this ruling seems to conflict with those in other circuits, the Supreme Court declined to hear the case.

Bankruptcy attorney Devin Sawdayi has represented people in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies since 1997, helping them rebuild their finances with dignity and respect. To schedule a free and confidential consultation to see how we can help you, please contact us today online or at (310) 475-939.

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Photo credit: By Joshua Doubek (Own work) [CC-BY-SA-3.0], via Wikimedia Commons.

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