649 B.R. 30
Bankr. E.D. Wis.2023Background
- Debtors Michael and Janelle Rios filed a Chapter 13; the IRS filed a proof of claim for $260,611.60 (asserting secured, priority, and unsecured portions) for prepetition federal taxes (assessments 2005–2015); the IRS did not file Notices of Federal Tax Lien.
- Debtors’ primary income is Social Security; combined monthly net income is $2,258, which their Chapter 13 plan directs to the trustee over 60 months to pay mortgage arrearages, other secured creditors, trustee and attorney fees; plan pays only the IRS’s asserted priority portion, not the remainder of the IRS claim.
- The IRS moved for relief from the automatic stay to enforce its statutory tax liens and to set off/levy Social Security benefits, arguing its lien interest in the Debtors’ rights to Social Security is not adequately protected.
- Debtors countered that Social Security benefits are excluded from the bankruptcy estate (42 U.S.C. § 407), that the IRS failed to file Notices of Federal Tax Lien (arguably limiting lien enforcement), and that the IRS is not a secured creditor under § 506(a) so adequate protection is not required.
- The court found (1) federal tax liens under 26 U.S.C. §§ 6321–6322 arose at assessment and attach to prepetition rights to receive future Social Security payments, (2) the benefits are excluded from the estate (not merely exempted), and (3) lack of a filed NFTL affects only third-party validity, not the IRS’s underlying lien against the debtor.
- Because the Debtors offered no adequate protection and plan payments would deplete IRS collateral, the court modified the automatic stay to permit the IRS to enforce its federal tax liens against the Debtors’ rights to Social Security benefits under applicable nonbankruptcy law and denied all other requested relief.
Issues
| Issue | Plaintiff's Argument (IRS or proponent) | Defendant's Argument (Debtors) | Held |
|---|---|---|---|
| Does the IRS have an "interest in property" in the Debtors’ Social Security benefits? | Prepetition assessments created federal tax liens under §6321 that attach to all property and rights to property, including rights to future Social Security payments. | Social Security benefits are excluded from the estate (and exemptions/absence of NFTL may shield them). | IRS has a prepetition lien that attaches to rights to Social Security benefits; benefits being excluded from the estate does not eliminate the IRS’s lien. |
| Is the IRS entitled to adequate protection of that interest under §362(d)(1) even if not a §506(a) secured creditor? | §362(d)(1) protects any party in interest with an interest in property; the IRS’s lien requires protection because the plan will use the collateral without compensating the IRS. | Because the IRS is not a secured creditor under §506(a), Debtors need not provide adequate protection. | Adequate-protection requirement is broader than §506(a); IRS has an interest requiring protection and Debtors offered none, so cause for relief exists. |
| Does the absence of a filed Notice of Federal Tax Lien bar the IRS from enforcing its lien against Social Security benefits? | A filed NFTL only affects the lien’s validity against third parties; the lien arises at assessment under §6322 and remains against the taxpayer’s rights. | Because no NFTL was filed, exemptions or other Code provisions should prevent lien enforcement against benefits. | The lack of NFTL does not defeat the IRS’s underlying lien as to the debtor; because benefits are excluded (not exempted) §522(c)(2)(B) is inapplicable. |
| May the court authorize the IRS to set off or levy Social Security payments by a specific monthly amount (here $2,258)? | IRS sought modification to levy the Debtors’ reported disposable income (combined $2,258) to satisfy tax debt. | Debtors opposed setoff/levy of Social Security and contested the amount and legal basis. | Court declined to decide the novel issue of setoff against Social Security; modification was limited to permitting enforcement of statutory liens under nonbankruptcy law and denied other relief. |
Key Cases Cited
- In re Vitreous Steel Prods. Co., 911 F.2d 1223 (7th Cir. 1990) (bankruptcy stay-relief inquiry tests for a colorable claim; does not adjudicate lien validity)
- Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26 (1st Cir. 1994) (lifting automatic stay is not an adjudication of claim validity)
- United States v. Nat’l Bank of Commerce, 472 U.S. 713 (U.S. 1985) (§6321’s term "property" is broad and reaches many interests)
- Drye v. United States, 528 U.S. 49 (U.S. 1999) (statutory "property" includes rights with exchangeable value)
- Carpenter v. Ries (In re Carpenter), 614 F.3d 930 (8th Cir. 2010) (Social Security proceeds are excluded from the bankruptcy estate under §407)
- In re Bailey, 574 B.R. 15 (Bankr. D. Me. 2017) (debtor’s use of pension/Social Security without adequate protection warranted stay relief)
- IRS v. Snyder, 343 F.3d 1171 (9th Cir. 2003) (IRS may seek stay relief to enforce liens on non-estate property)
- Berg v. Social Sec. Admin., 900 F.3d 864 (7th Cir. 2018) (addresses interaction of Social Security benefits with offset/setoff issues)